Which of the Following Regarding the Mean and Variance of a Portfolio

question 94

Multiple Choice

Which of the following regarding the mean and variance of a portfolio of two stocks is false?

• A) \[E \left( R _ { y } \right) = \left( w _ { 1 } + w _ { 2 } \right) \left[ E \left( R _ { 1 } \right) + E \left( R _ { 2 } \right) \right]\]
• B) \[V \left( R _ { y } \right) = w _ { 1 } ^ { 2 } V \left( R _ { 1 } \right) + w _ { 2 } ^ { 2 } V \left( R _ { 2 } \right) + 2 w _ { 1 } w _ { 2 } \operatorname { COV } \left( R _ { 1 } R _ { 2 } \right)\]
• C) \[V \left( R _ { y } \right) = w _ { 1 } ^ { 2 } \sigma _ { 1 } ^ { 2 } + w _ { 2 } ^ { 2 } \sigma _ { 2 } ^ { 2 } + 2 w _ { 1 } w _ { 2 } \rho \sigma _ { 1 } \sigma _ { 2 }\]
• D) \[E \left( R _ { y } \right) = w _ { 1 } E \left( R _ { 1 } \right) + w _ { 2 } E \left( R _ { 2 } \right)\]

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Definitions:

Interest Expense

The charges an entity must pay for the use of borrowed capital over a period.

Lease Liability

An obligation representing the present value of future lease payments that a lessee is committed to making under a lease agreement.

Capital Leases

Lease agreements that involve the lessee effectively owning the asset and accruing its benefits and drawbacks, subject to certain criteria.

Operating Lease

A contractual arrangement giving the lessee temporary use of the property, with continued ownership of the property by the lessor.