The return on the risky portfolio is 15%. The risk-free rate, as well as the investor's borrowing rate, is 10%. The standard deviation of return on the risky portfolio is 20%. If the standard deviation on the complete portfolio is 25%, the expected return on the complete portfolio is _________.
A. 6%
B. 8.75 %
C. 10%
D. 16.25%
Answer: D. 16.25%
sC = y × sp = .25
sC = y × .20 = .25
y = .25/.20 = 1.25
1 - y = -.25
E(rC) = 1.25 × 15% - .25 × 10% = 16.25%