Final answer:
The expected return of the three-asset portfolio is 11.71%. Asset A is the safest based on the lowest standard deviation. Asset C is the riskiest with the highest standard deviation and also has the highest expected return. Option D is correct.
Step-by-step explanation:
The student has asked to calculate the expected return for a three-asset portfolio. To find this, we multiply the expected return of each asset by its weight in the portfolio and then sum those products. The expected returns are 6.75%, 12.35%, and 14.25% for Asset A, B, and C respectively. The weights are 0.25 for Asset A, 0.35 for Asset B, and 0.40 for Asset C. Calculating the weighted return for each gives:
Asset A: 0.0675 * 0.25 = 0.016875
Asset B: 0.1235 * 0.35 = 0.043225
Asset C: 0.1425 * 0.40 = 0.057
The sum of these weighted returns gives the portfolio's expected return:
0.016875 + 0.043225 + 0.057 = 0.1171 or 11.71%.
Looking at the standard deviation which measures the risk or volatility of each asset, Asset A has the lowest standard deviation (0.12) and thus is the safest investment. Asset C, with the highest expected return, also has the highest standard deviation (0.1835) and is therefore the riskiest investment. Asset B has the highest expected return, on average, if we consider only the expected returns without taking into account the weight in the portfolio.