Question

An investor invests 50% of his wealth in a risky asset with an expected rate of return of 10% and a standard deviation of 20% and 50% in a T-bill that pays 6%. What is her portfolio's expected return? A) 10%

B) 9%
C) 8%
D) 7%

Answer 1

The expected return on an investor's portfolio that is evenly split between a risky asset with a 10% return and a T-bill with a 6% return is 8%.

Step-by-step explanation:

The question involves calculating the expected return of a portfolio that comprises 50% in a risky asset with a rate of return of 10% and a standard deviation of 20%, and 50% in a T-bill that pays 6%. The expected return on the portfolio is calculated by taking the weighted average of the expected returns of the two assets.

The calculation is as follows:

Expected return on the portfolio = (50% * 10%) + (50% * 6%)
= 5% + 3%
= 8%

Therefore, the expected return on the investor's portfolio is 8%, which corresponds to choice C