Consider the following statements in the context of asset allocation in a world involving only two different asset classes: a risky asset and a risk-free asset.

1. The return on the complete portfolio involving the risky asset and the risk-free asset is always equal to the weighted average of individual return of these two asset classes.

2. The risk (standard deviation) of the complete portfolio involving the risky asset and risk-free asset is always equal to the weighted average of individual risk (standard deviation) of these two asset classes.

3. The risk (standard deviation) of the complete portfolio involving the risky asset and risk-free asset is NOT proportional to the investment weight in the risky asset.

Which of these above statements is (are) CORRECT?

Select one:

a.Statement (1) only

b.Statement (1) and Statement (2) only

c.Statement (2) and Statement (3) only

d.Statement (1) and Statement (3) only

e.Statement (1), Statement (2), and Statement (3) only