Question

Suppose you invest equal amounts in a portfolio with an expected return of 16% and a standard deviation of returns of 18% and a risk-free asset with an interest rate of 4%. Calculate the expected return on the resulting portfolio. Group of answer choices

Answer 1

Answer: 10%

Step-by-step explanation:

You invest equal amounts in a portfolio yielding 16% and a risk-free asset yielding 4%.

The expected return will be a weighted average of these two;

= (Weight of the Portfolio * Portfolio return) + (Weight of the Portfolio * risk-free rate)

= (0.5 * 16%) + (0.5 * 4%)

= 8% + 2%

= 10%