You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a treasury bill with a rate of return of 6%.
-The return on the risky portfolio is 15%.The risk-free rate as well as the investor's borrowing rate is 10%.The standard deviation of return on the risky portfolio is 20%.If the standard deviation on the complete portfolio is 25%,the expected return on the complete portfolio is _________.
A) 6.00%
B) 8.75 %
C) 10.00%
D) 16.25%

Question

Quizplus · Accepted Answer

The expected return on the complete portfolio can be calculated using the formula: E(Rc) = Rf + y * [E(Rp) - Rf], where y is the proportion of the portfolio in the risky asset. Given the standard deviation of the complete portfolio is 25%, we can find y using the formula: σc = y * σp. Solving for y gives y = 25% / 20% = 1.25. Plugging into the expected return formula: E(Rc) = 6% + 1.25 * (15% - 6%) = 16.25%.

You Invest $1,000 in a Complete Portfolio