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Basic Question 2 of 6
You invest $100 in a risky asset with an expected rate of return of 12% and a standard deviation of 15%, and a T-bill with a rate of return of 5%. What percentages of your money must be invested in the risky asset and the risk-free asset, respectively, to form a portfolio with an expected return of 9%?
B. 75% and 25%
C. 57% and 43%
A. 85% and 15%
B. 75% and 25%
C. 57% and 43%
User Contributed Comments 7
| User | Comment |
|---|---|
| poomie83 | Could someone provide an explanation? |
| GinnyB | Portfolio Return E(rp) = w1rf + (1-w1)E(ri) 0.09 = w1(0.05) + (1-w1)(0.12) .03 = .07w1 w1 = 43% = % invested in risk free asset (1-w1) = 57% = % invested in risky asset |
| thekobe | or simply do the calculations for the three options till you get the 9% |
| safash | @the Kobe tat sounds good |
| moneyguy | Ignore the standard deviation information given. Only need expected returns and weights... |
| johntan1979 | @thekobe and safash... which will take up tons of precious minutes (especially if the right answer is the last option) This is basic algebra. Either you get it or you don't. |
| jonan203 | yea, i wouldn't rely on the process of elimination for the CFA. use the formula and solve for w1, much faster than pluging in the values and seeing if they equal 9%. |
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Learning Outcome Statements
explain the selection of an optimal portfolio, given an investor's utility (or risk aversion) and the capital allocation line
CFA® 2025 Level I Curriculum, Volume 2, Module 1.