60、When a risk-free asset is combined with a portfolio of risky assets, will the:

A. Answer A

B. Answer B

C. Answer C

D. Answer D

[此贴子已经被作者于2008-11-7 14:10:25编辑过]

60、When a risk-free asset is combined with a portfolio of risky assets, will the:

A. Answer A

B. Answer B

C. Answer C

D. Answer D

Correct answer = C

"An Introduction to Asset Pricing Models," Frank K. Reilly and Keith C. Brown
2008 Modular Level I, Vol. 4, pp. 256-257
Study Session 12-51-a
explain the capital market theory, including its underlying assumptions, and explain the effect on expected returns, the standard deviation of returns, and possible risk/return combinations when a risk-free asset is combined with a portfolio of risky assets
The variance of a portfolio consisting of a risky asset and a risky portfolio is
σ² _port = w² _RF σ² _RF + (1 - w_RF)² σ²_i + 2w_RF (1 - w_RF) r_RFI  σ_RF  σ_i
Because the variance of the risk-free asset is zero, σ² _RF = 0, the equation simplifies to
σ² _port  = (1 - w_RF)² σ²_i
The standard deviation is σ _port = (1 - w_RF) σ_i. Thus the standard deviation of the portfolio is a linear function of the standard deviation of the risky asset portfolio.
The resulting graph of possible portfolio return and risk combinations is also linear, meaning that it will display constant, not increasing, incremental return per unit of incremental risk change.