Assume an Economy in Which There Are Three Securities: Stock

question 13

Multiple Choice

Assume an economy in which there are three securities: Stock A with rA = 10% and A = 10%; Stock B with rB = 15% and B = 20%; and a riskless asset with rRF = 7%. Stocks A and B are uncorrelated (rAB = 0) . Which of the following statements is most CORRECT?

• A) The expected return on the investor's portfolio will probably have an expected return that is somewhat above 15% and a standard deviation (SD) of approximately 20%.
• B) The expected return on the investor's portfolio will probably have an expected return that is somewhat below 10% and a standard deviation (SD) of approximately 10%.
• C) The expected return on the investor's portfolio will probably have an expected return that is somewhat below 15% and a standard deviation (SD) that is between 10% and 20%.
• D) The investor's risk/return indifference curve will be tangent to the CML at a point where the expected return is in the range of 7% to 10%.
• E) Since the two stocks have a zero correlation coefficient, the investor can form a riskless portfolio whose expected return is in the range of 10% to 15%.

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Definitions:

Rayonnant

The “radiant” style of Gothic architecture, dominant in the second half of the 13th century and associated with the French royal court of Louis IX at Paris.

Flamboyant

A Late French Gothic style of architecture superseding the Rayonnant style and named for the flame-like appearance of its pointed bar tracery.

Stained Glass

The art of creating pictures or patterns using pieces of colored glass, often assembled in windows, with light passing through to produce a decorative effect.

Delicate Ornamentation

The application or incorporation of detailed and finely crafted decorations to enhance the aesthetic appeal of artworks, buildings, or objects.