High School
SAT
ACT
University
MCAT
LSAT
DAT
Wize University Introduction to Finance Textbook > CAPM

Risk-Free Investing

Types of RiskPrevious Section
Risk-Free BorrowingNext Section
Popular Courses
Find My Course
0:00 / 0:00

Risk-Free Investing

When an investor places his or her money into a portfolio containing a risky investment and a risk-free investment like a T-bill, the following formula is used to determine the expected return of the portfolio.


Formula Breakdown:

aa : a risky asset
RF: the risk-free rate
0:00 / 0:00

Example: Risk-Free Investing

You invest $5,000 into AAPL with an expected return of 15% and standard deviation of 8%, you also invest $4,000 into Canadian T-bills which will pay a risk-free return of 2%.
  1. What is the expected return of your portfolio?
  2. What is the standard deviation of your portfolio?

Practice: Risk-Free Investing

You plan to invest part of your portfolio in stock of Netflix (NFLX) but want to limit your risk by also investing in T-bills. Knowing the expected return and standard deviation of NFLX are 25% and 19% respectively, what fraction of your money should you invest in T-bills so that your portfolio standard deviation is 7%?

Enter your answer in decimal format and rounded to 4 decimal places.
Extra Practice
A portfolio consists of two securities: a risk-free asset and stock X. The expected return on the risk-free asset is 4.25%. The expected return of Stock X is 16% with a standard deviation of 22%. What is the portfolio standard deviation if the expected return for the portfolio is 12%?
A portfolio has $1,000 invested in risk-free assets with a 4% rate of return and $4,000 invested in the market, with a 16% rate of return and 19% standard deviation.
What is the expected return of the portfolio?
A portfolio has $1,000 invested in risk-free assets with a 4% rate of return and $4,000 invested in the market, with a 16% rate of return and 19% standard deviation.
What is the standard deviation of the portfolio?
You have constructed a portfolio with 80% invested in the market portfolio and the rest invested in risk free assets. If the expected return and standard deviation of the market are 15% and 12%, and the risk free rate is 4%, what is the standard deviation of your portfolio?
You have constructed a portfolio with 80% invested in the market portfolio and the rest invested in risk free assets. If the expected return and standard deviation of the market are 15% and 12%, and the risk free rate is 4%, what is the expected return of your portfolio?
A portfolio with a standard deviation of 10% is made up of the market portfolio and the risk free rate. The risk free rate is 5% and the market expected return is 20% with a standard deviation of 16%.