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Basic Question 5 of 6
A risk-free asset has a return of 0.05. A risky portfolio, X, has an expected return of 0.12 and a standard deviation of 0.20. For a portfolio that is 60% X and 40% risk-free asset, the ______
II. standard deviation is 12%.
III. standard deviation is 20%.
I. expected return is 8.5%
II. standard deviation is 12%.
III. standard deviation is 20%.
User Contributed Comments 10
| User | Comment |
|---|---|
| gsuwp | Isnt the standard deviation 12% because .6*20 + .4*0 = 12% |
| aartis | Standard Deviation of Portfolio = Standard Deviation of X into wieght of X |
| soarer1 | Can someone pls explain? Where did the 9.2% go to? |
| chamad | a risk free asset has 0 standard deviation. So average weighted-----.6*20 + .4*0 = 12% |
| mariodeb | The 9.2% shows the expected return |
| VenkatB | Variance of portfolio = weight of x squared * variance of x + weight of risk free asset squared * variance of risk free asset + 2 * weight of x * weight of riskfree asset * Correlation between x and riskfree asset * sd of x * sd of riskfree asset. Because sd of rrisk free asset = 0, variance of portfolio = = (0.60^2) * (0.20^2) + 0 + 0 = 0.0144 So sd of p = square root of (0.0144) = 0.12 = 12% |
| Renaud1807 | Thanks VenkatB |
| bundy | SD formula for a combinatin of risk free asset and risky asset is (1-Wrf)sd therefore .60 X .20 = .12 |
| michlam14 | yeah calculation for E(R) is not required for this question, but I think it's a trial and error thing - we are being tested on knowing what to use for calculating E(R) and standard deviation to come at the correct answer |
| jonan203 | the 8.5% was a wrong answer intended to through you off if you calculate 9.2% correctly |
I passed! I did not get a chance to tell you before the exam - but your site was excellent. I will definitely take it next year for Level II.
Tamara Schultz
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.