CFA Practice Question
If an investor puts 70% of his funds in an asset that has a return of 12% and risk of 18%, and the
remainder in an asset that generates a return of 6% and has a risk of 7%, given the correlation
between the two investments is 0.61, what is the overall risk and return that the investor is
exposed to?
A. 10.2% and 13.98% respectively.
B. 13.98% and 10.2% respectively.
C. 10.2% and 15.02% respectively.
Explanation: Care: question asks for risk first and then return!
Return =( 0.7 x 12) + (0.3 x 6) = 10.2%
Risk = (0.72 x 0.182 + 0.32 x 0.072 + 2 x 0.7 x 0.3 x 0.18 x 0.07 x 0.61)0.5 = 13.98%
Return =( 0.7 x 12) + (0.3 x 6) = 10.2%
User Contributed Comments 2
| User | Comment |
|---|---|
| jjhigdon | Wow, so apparently if you actually read the question, you don't even need to go through the headache of calculating Std Dev... |
| cfastudypl | True jjhigdon, that is why AN said Care. Good luck everyone! |