Given the following information calculate the standard deviationof returns of a portfolio that combines government...

Given the following information calculate the standard deviation of returns of a portfolio that combines government bonds with the market portfolio.

Rm = .11

Rf = .05

Standard Deviation of market return = 0.14

Enter your answer as a decimal accurate to three decimal places.

Proportion invested in Rm = 0.5

Solutions

Expert Solution

See here,

The risk of government bonds is zero because government will not defaults. So, standard deviation of bonds =0.

Portfolio standard deviation =SQRT((weight of market*standard deviation of market)^2+(weight of bonds*standard deviation of bond)^2)

Here they gave proportion invested in market=0.5

So proportion invested in bond =1-weight of market=1-0.5=0.5

Give risk of market=0.14

Standard deviation of portfolio =sqrt((0.5*0.14)^2+(0.5*0)^2)

Portfolio standard deviation =0.070 or 7%

jeff jeffy answered 2 years ago

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