Question

Suppose that the risk-free rate is 6 percent and the expected return of the market portfolio is 14 percent, with a standard deviation of 24 percent. The investor wants to create a portfolio with a standard deviation of 20 percent. Calculate the portfolio’s expected return.

Answer 1

Standard deviation of market portfolio = 24%

Let weight of market portfolio be w,

So,

0.20 = 0.24(w)

w = 83.33%

Expected return = 0.8333(0.14) + (1 - 0.8333)(0.06)

Expected return = 12.67%