Calculating Risk for Portfolio Investment: Greg Burns, CFA, and Victoria Hull

Explanation

To calculate the standard deviation for Victoria Hull's overall investment, we need to consider the portfolio allocation between the risky asset (portfolio P) and the risk-free asset. Let's break down the steps:

1. Calculate the standard deviation of the risky asset:

   • The portfolio P has a standard deviation of 20%.

2. Calculate the allocation of Hull's investment in the risky asset:

   • Burns advises Hull to invest 40% in portfolio P.
   • This means that 40% of Hull's investment will be exposed to the risky asset.

3. Calculate the allocation of Hull's investment in the risk-free asset:

   • Since Hull will invest the remainder of her portfolio (60%) in the risk-free asset, there is no risk associated with this portion.

4. Calculate the weighted standard deviation of Hull's overall investment:

   • Multiply the standard deviation of the risky asset by the allocation in the risky asset.
   • Multiply the standard deviation of the risk-free asset (which is 0%) by the allocation in the risk-free asset.
   • Add these two components together.

Let's perform the calculations:

Allocation in the risky asset = 40% Allocation in the risk-free asset = 60%

Weighted standard deviation of Hull's overall investment = (Allocation in the risky asset * Standard deviation of the risky asset) + (Allocation in the risk-free asset * Standard deviation of the risk-free asset)

= (0.40 * 20%) + (0.60 * 0%) = 8% + 0% = 8%

Therefore, the standard deviation for Victoria Hull's overall investment will be 8%.

The correct answer is B. 8%.