An investor invests 65 of her wealth in a risky asset with a

An investor invests 65% of her wealth in a risky asset with an expected rate of return of 16% and a standard deviation of 22% and she puts 35% in a Treasury bill that pays 4%. Her portfolio\'s expected rate of return and standard deviation are __________ and __________ respectively.

Solution

Portfolio\'s expected rate of return is

0.65*0.16+0.35*0.04=0.104+0.014=0.118

So portfolio\'s expected rate of return is 11.8%.

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Since there is no variance in the Treasury bill so portfolio\'s standard devaition is only due to risky asset. Therefore portfolio\'s standard devaition is

0.65*0.22=0.143

That is standard deviation of portfolio is 14.3%.