2. A particular portfolio of stocks has an expected return of 12% and a standard

Question

2. A particular portfolio of stocks has an expected return of 12% and a standard deviation of 0.25. Two investors, John and Sarah, each have $10,000 to invest. Sarah invests $7000 in the portfolio of stocks and the rest of her money she invests in Treasury Bills (a risk free investment) to earn of yield 4%. John invests all of his money in the same portfolio of stocks. John then borrows an additional $5000 at a rate of 4% and invests that in the portfolio as well. What is the overall expected return and standard deviation of John's and Sarah's investments?

Explanation / Answer

Sarah:

John:

Particulars Stock T-Bills Total ($) Total investment 7,000 3,000 10,000 Return 12% 4% Standard deviation 0.25 nil Proportion 0.70 0.30 E(r) 8.4% 1.2% 9.6% or $960 standard deviation of total investment .175 17.5%

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