Stocks A, B, and C Are Similar in Some Respects

question 10

Multiple Choice

Stocks A, B, and C are similar in some respects: Each has 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 greater than 25%.
• B) Portfolio AB has a standard deviation that is greater than 25%.
• C) Portfolio AB has a standard deviation that is equal to 25%.
• D) Portfolio AC has a standard deviation that is less than 25%.
• E) Portfolio AC has an expected return that is less than 10%.

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Definitions:

Journal Entry

A record in bookkeeping that logs the debit and credit aspects of a financial transaction.

Retained Earnings

The portion of a business's profits not distributed to shareholders, reinvested in the business instead.

Push-down Accounting

An accounting method applied in business combinations where the purchase price of an acquired entity is reflected in the financial statements of the acquired company.

Business Combination

A transaction or event in which two or more businesses come together to form a single reporting entity, typically involving the acquisition of one by another.