Stocks A,B,and C All Have an Expected Return of 10

question 98

Multiple Choice

Stocks A,B,and C all have an expected return of 10% and a standard deviation of 25%.Stocks A and B have returns that are independent of one another,i.e. ,their correlation coefficient,r,equals zero.Stocks A and C have returns that are negatively correlated with one another,i.e. ,r is less than 0.Portfolio AB is a portfolio with half of its money invested in Stock A and half in Stock B.Portfolio AC is a portfolio with half of its money invested in Stock A and half invested in Stock C.Which of the following statements is CORRECT?

• A) Portfolio AC has an expected return that is less than 10%.
• B) Portfolio AC has an expected return that is greater than 25%.
• C) Portfolio AB has a standard deviation that is greater than 25%.
• D) Portfolio AB has a standard deviation that is equal to 25%.
• E) Portfolio AC has a standard deviation that is less than 25%.

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Definitions:

Times Interest Earned Ratio

A financial metric used to determine a company's ability to meet its debt obligations by comparing its income before interest and taxes to its interest expenses.

Interest Expense

The cost incurred by an entity for borrowed funds over a period, reported on the income statement.

Income Before Taxes

The earnings of a company before taxes have been deducted.

Employer Payroll Taxes

Taxes that employers are required to pay on behalf of their employees, including social security and Medicare taxes.