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 r_A = 10% and ?_A = 10%; Stock B with r_B = 15% and ?_B = 20%; and a riskless asset with r_RF = 7%.Stocks A and B are uncorrelated (r_AB = 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 below 10% and a standard deviation (SD) of approximately 10%.
• B) 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%.
• C) 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%.
• D) 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%.
• E) 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%.

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Definitions:

Unemployment Rate

The ratio of jobless individuals in the labor force who are not just unemployed but are actively pursuing employment opportunities.

Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, eroding purchasing power over time.

Unemployment

The situation when individuals who are capable of working and are actively seeking work but are unable to find employment.

Short Run

A period during which at least one factor of production is considered fixed, typically used to describe a timeframe in which firms cannot alter plant capacity.