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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Definitions:

National Income

The total income earned by a nation's people and businesses, including salaries, profits, and investment income, within a specific period.

Net National Product

The total value of all goods and services produced by a country's residents in a year, minus depreciation.

Depreciation

A decrease in the value of a currency as measured by the amount of foreign currency it can buy.

Intermediate Goods

Goods or services used in the production process of final goods and services but are not themselves final products.