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# Excpected return and standard deviation of a portfolio

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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.

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