Has a $50,000 Stock Portfolio with a Beta of 1

question 137

Multiple Choice

has a $50,000 stock portfolio with a beta of 1.2, an expected return of 10.8%, and a standard deviation of 25%.Becky also has a $50,000 portfolio, but it has a beta of 0.8, an expected return of 9.2%, and a standard deviation that is also 25%.The correlation coefficient, r, between Bob's and Becky's portfolios is zero.If Bob and Becky marry and combine their portfolios, which of the following best describes their combined $100,000 portfolio?

• A)The combined portfolio's expected return will be less than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.
• B)The combined portfolio's beta will be equal to a simple weighted average of the betas of the two individual portfolios, 1.0; its expected return will be equal to a simple weighted average of the expected returns of the two individual portfolios, 10.0%; and its standard deviation will be less than the simple average of the two portfolios' standard deviations, 25%.
• C)The combined portfolio's expected return will be greater than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.
• D)The combined portfolio's standard deviation will be greater than the simple average of the two portfolios' standard deviations, 25%.
• E)The combined portfolio's standard deviation will be equal to a simple average of the two portfolios' standard deviations, 25%.

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Definitions:

Interest Expense

Interest expense is the cost incurred by an entity for borrowed funds, usually expressed in the form of interest payments on loans, bonds, or credit lines.

Net Income

The remaining earnings of a company once expenses and taxes are subtracted from the gross revenue.

Times Interest Earned Ratio

A financial ratio that measures a company’s ability to meet its interest obligations based on its earnings before interest and taxes (EBIT).

Default

Failure to fulfill a financial obligation, such as missing a loan repayment.