an analyst determines a portfolio with 35% weight in investment a and a 65% weight in investment b will have a standard deviation of returns equal to 0. * investment a has an expected return of 8% * investment b has a standard deviation of returns of 7.1% and a covariance with the market of 0.0029 * the risk-free rate is 5% and the market risk premium is 7% if no arb opportunities are available, the expected rate of return on the combined port is closest to: a. 5% b. 6% c. 7%

Forget all the crap in the question. If no arbitrage opportunities are available, the return must equal the risk free rate. The correct answer is A. You’re welcome BTW what does this question have to do with ‘bond spreads’?

that was the explanation given in the answer key, but I wanted to see how to calculate the answer out.

You can’t calculate the answer. All that information is just provided to make you scratch your head until you’re bald.

I think the standard deviation being 0 makes the return have to equal 5%… But even if there are no arb opportunities, there is still the possibility of earning a return above the risk free rate by taking on more risk (more positive standard deviation).