Excpected return and standard deviation of a portfolio
Given the following expected return vector and variance-covariance matrix for three assets:
ER= 10.1
7.8
5.0
VC= 210 60 0
60 90 0
0 0 0
and given the fact that Pie Traynor's risky portfolio is split 50-50 between the two risky asets:
a) Which security of the three must be the riskfree aset ? Why
b) Calculate the excpected return and standard deviation ?
c) If the riskfree asset makes up 25% of Pie's total portfolio, what are the total portfolio expected return and standard deviation ?
d) What does the efficient set look like if riskfree borrowing is permitted but no lending is allowed? Explain with words and graphs.
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Solution Summary
Given the expected return vector and variance-covariance matrix for three assets, the solution identifies which security of the three must be the riskfree aset and calculates the excpected return and standard deviation of a portfolio made of risky assets. The solution also calculates the excpected return and standard deviation of a portfolio made of risky assets and risk free asset.