You combine three assets (A, B, and C) into a portfolio. What is the expected return and standard deviation of the portfolio? You will put 25% of your funds into
Asset A with an expected return of 5% and a standard deviation of zero, 50% of your funds into Asset B with an expected return of 10% and a standard deviation of 5%, and 25% of your funds into Asset C with an expected return of 5% with a standard deviation of zero.
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A. B. C. D.A
Return = (.25)(.05) + (.50)(.10) + (.25)(.05) = .075Trick, the zero standard deviation causes everything to go to zero.
σp = š[AA+BB+CC+ 2wAwBσAσBÏAB+ 2wAwCσAσCÏAC+2wCwBσCσBÏCB]
σp = š[.2(0+ .5(.05+ .2(0+ 2(.25)(.5)(0)(.05)(?) + 2(.25)(.25)(0)(0)(?) +2(.25)(.5)(0)(.5)(?)]
σp = š[5(.05= 50(.05) = .025 with risk free assets in the portfolio the only risk is associated with the portion of funds invested in the risky asset.