Question

You manage a risky portfolio with an expected rate of return of 20% and a standard deviation of 36%. The T-bill rate is 5%.Your client chooses to invest 60% of a portfolio in your fund and 40% in an essentially risk-free money market fund. What are the expected return and standard deviation of the rate of return on his portfolio? (Do not round intermediate calculations. Round "Standard deviation" to 2 decimal places.)

Answer 1

Answer and Explanation:

The computation of the expected rate of return and the standard deviation is shown below;

The Expected Rate of Return is

= Weighted × expected rate of return + weighted × t-bill rate

= 0.60 × 20 + 0.40 × 5

= 14%

And,

The Standard Deviation is

= Weighted × standard deviation + weighted × 0

= 0.60 × 36 + 0.40 × 0

= 21.60%