Question

Hillary can invest her family savings in two assets: riskless treasury bills or a risky vacation home real estate project on an Arkansas river. The expected return on treasury bills is 4 percent with a standard deviation of zero. The expected return on the real estate project is 30 percent with a standard deviation of 40 percent.

5) Refer to Scenario 5.10. If Hillary invests 30 percent of her savings in the real estate project and the remainder in treasury bills, the expected return on her portfolio is:
A) 4 percent.
B) 11.8 percent.
C) 17 percent.
D) 22.2 percent.
E) 30 percent.

Answer 1

The expected return on her portfolio is B) 11.8%

Step-by-step explanation:

Hi, the expected return of a portfolio can be found by multiplying the weight of each of the assets times each of its expected return, that is:

`E(portfolio)=E(Tbills)*Weight(Tbills)+E(other)*Weight(other)`

So everything should look like this

`E(portfolio)=0.04*0.70+0.3*0.3=0.118`

The expected return of the portfolio is 11.8%, that is option B)

Best of luck.