- CFA Exams
- CFA Level I Exam
- Study Session 18. Portfolio Management (1)
- Reading 53. Portfolio Risk and Return: Part II
- Subject 1. Capital Market Theory

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**CFA Practice Question**

Ace Investment Managers manages an equity fund with an expected risk premium of 10% and a standard deviation of 24%. The risk-free rate is 6%. The expected return on the market index is 12%, and the market index has a standard deviation of 20%. Ace's client has a $300,000 portfolio, $180,000 of which is invested in the equity fund and $120,000 of which is invested in a T-bill money market fund. The standard deviation of return on this combined portfolio is closest to ______.

A. 9.6%

B. 14.4%

C. 15.8%

**Explanation:**Standard deviation of portfolio = (180/300)0.24 = 14.4%. The return on the amount invested in T-bills has no variability because it is riskless. Thus, the source of risk is the standard deviation of the equity fund weighted by the 60% of the portfolio invested in it.

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**User Contributed Comments**
2

User |
Comment |
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chris297 |
Can anyone explain this question? |

ngaz |
because T-Bills are risk-free, they have a standard deviation of 0 - therefore you only weight the standard deviation of the risky asset and forget about the T-Bill (in this case contributing 60% to this portfolio x 24% = 14.4%) |