An investor wishes to construct a portfolio consisting of a 70 percent allocation to a stock index and a 30 percent allocation to a risk-free asset. The return on the risk-free asset is 4.5 percent, and the expected return on the stock index is 12 percent. The standard deviation of returns on the stock index is 6 percent. Calculate the expected standard deviation of the portfolio.

the standard deviation is 4.2%

Explanation:

The computation of the standard deviation of the portfolio is given below:

expected standard deviation of the portfolio is

= Allocation percentage of stock index × standard deviation of returns on the stock index

= 0.70 × 6%

= 4.2%

Hence, the standard deviation is 4.2%

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