Question
Portfolio risk Suppose that Treasury bills offer a return of about 6% and the expected market risk premium is 8.5%. The standard deviation of Treasury-bill
Portfolio risk Suppose that Treasury bills offer a return of about 6% and the expected market risk premium is 8.5%. The standard deviation of Treasury-bill returns is zero and the standard deviation of market returns is 20%. Use the formula for portfolio risk to calculate the standard deviation of portfolios with different proportions in Treasury bills and the market. (Note: The covariance of two rates of return must be zero when the standard deviation of one return is zero.) Graph the expected returns and standard deviations. What is the slope of the line and what does it described/signify? What happens if an investment alternative does not plot on the line?
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