Bob Has a $50,000 Stock Portfolio with a Beta of 1.2

question 122

Multiple Choice

Bob has a $50,000 stock portfolio with a beta of 1.2, an expected return of 10.8%, and a standard deviation of 25%. Becky also has a $50,000 portfolio, but it has a beta of 0.8, an expected return of 9.2%, and a standard deviation that is also 25%. The correlation coefficient, r, between Bob's and Becky's portfolios is zero. If Bob and Becky marry and combine their portfolios, which of the following best describes their combined $100,000 portfolio?

• A) The combined portfolio's expected return will be LESS THAN the simple weighted average of the expected returns of the two individual portfolios, 10.0%.
• B) The combined portfolio's beta will be EQUAL TO a simple average of the betas of the two individual portfolios, 1.0; its expected return will be EQUAL TO a simple weighted average of the expected returns of the two individual portfolios, 10.0%; and its standard deviation will be LESS THAN the simple average of the two portfolios' standard deviations, 25%.
• C) The combined portfolio's expected return will be GREATER THAN the simple weighted average of the expected returns of the two individual portfolios, 10.0%.
• D) The combined portfolio's standard deviation will be GREATER THAN the simple average of the two portfolios' standard deviations, 25%.

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