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**CFA Practice Question**

What is the standard deviation of a two-asset portfolio consisting of a risky asset J (standard deviation: 0.1) and a Treasury Bill. Assume that there is an equal weighting of each security.

A. 0.0001

B. 0.0100

C. 0.0500

**Explanation:**This is a common question by CFA Institute. Level I candidates should realize that the covariance between a risky asset and a Treasury Bill = 0. Note: the standard deviation of a Treasury Bill = 0 so the covariance = 0 (the covariance equals the correlation multiplied by the respective standard deviations of each security or Cov

_{jk}=

*p*

_{jk}* 0.10 * 0.00). Thus, the only relevant term in the equation is the first term! The second and third terms in the equation drop out completely. The only relevant risk is the risky asset and the contribution to the portfolio is a function of the (weight of the risky asset squared multiplied by the variance of the risky asset).

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**User Contributed Comments**
5

User |
Comment |
---|---|

jackwez |
.5 x 0 + .5 x .01 = .05 |

lazio |
Good question! |

takor |
port std=(1-Wrfa)STDrfa; (1-0.5)0.1=0.05 |

bleublau |
.5 x 0 + .5 x .01 = .05 is wrong. The logic therein is not this simple. Covariance should be taken into account as AnalystNotes' explanation. |

GBolt93 |
yeah that would be if we were calculating portfolio beta, where it's just weight x beta. If it was anything, but a risk free asset .5x0+.5x.01 would be incorrect. |