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:

Contrast Effect

An effect that takes place when people rank something higher or lower than they should as a result of exposure to recent events or situations.

Perceptual Distortion

An error in perception resulting from individual biases or misinformation, affecting the interpretation of reality.

Attribution Theory

A theory that holds that people look for two causes to explain the behavior of others: internal attributions, which are personal characteristics of others, and external attributions, which are situational factors.

Behavior

The actions, reactions, and functioning of an individual or group in response to external and internal stimuli, observed in various contexts.