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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.

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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