CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

A risk-free asset has a return of 0.05. A risky portfolio, X, has an expected return of 0.12 and a standard deviation of 0.20. For a portfolio that is 60% X and 40% risk-free asset, the ______

I. expected return is 8.5%
II. standard deviation is 12%.
III. standard deviation is 20%.
Correct Answer: II

E(Rp) = (0.6)(0.12) + (0.4)(0.05) = 0.092 or 9.2%. wp σ 2X = (0.6)(0.20) = 0.12 or 12%

User Contributed Comments 10

User Comment
gsuwp Isnt the standard deviation 12% because .6*20 + .4*0 = 12%
aartis Standard Deviation of Portfolio = Standard Deviation of X into wieght of X
soarer1 Can someone pls explain? Where did the 9.2% go to?
chamad a risk free asset has 0 standard deviation. So average weighted-----.6*20 + .4*0 = 12%
mariodeb The 9.2% shows the expected return
VenkatB Variance of portfolio = weight of x squared * variance of x + weight of risk free asset squared * variance of risk free asset + 2 * weight of x * weight of riskfree asset * Correlation between x and riskfree asset * sd of x * sd of riskfree asset.

Because sd of rrisk free asset = 0, variance of portfolio = = (0.60^2) * (0.20^2) + 0 + 0 = 0.0144

So sd of p = square root of (0.0144) = 0.12 = 12%
Renaud1807 Thanks VenkatB
bundy SD formula for a combinatin of risk free asset and risky asset is (1-Wrf)sd

therefore .60 X .20 = .12
michlam14 yeah calculation for E(R) is not required for this question, but I think it's a trial and error thing - we are being tested on knowing what to use for calculating E(R) and standard deviation to come at the correct answer
jonan203 the 8.5% was a wrong answer intended to through you off if you calculate 9.2% correctly
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