CFA Level 1 - Portfolio Management
What happens when a risk-free asset is added to a portfolio of risky assets?
To begin, the risk-free asset has a standard deviation/variance equal to zero for its given level of return, hence the "risk-free" label.
- Expected Return - When the Risk-Free Asset is Added
Example: Risk-Free Asset and Expected Return
With the addition of the risk-free asset, the expected value of the investor's portfolio was decreased to 14.4% from 16%.
- Standard Deviation - When the Risk-Free Asset is Added
Example: Risk-free Asset and Standard Deviation
Similar to the affect the risk-free asset had on the expected return, the risk-free asset also has the affect of reducing standard deviation, risk, in the portfolio.