Stocks A, B, and C All Have an Expected Return

question 123

Multiple Choice

Stocks A, B, and C all have 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%.

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Definitions:

Worker Hours

The amount of time that employees spend working during a given period, often measured in hours per week or month.

Price Floor

A price floor is a legally imposed minimum price set above the equilibrium price, preventing market prices from falling below it.

Demand Curve

A graph showing the relationship between the price of a good and the quantity demanded, typically downward-sloping.

Quantity Demanded

The total amount of a good or service that consumers are willing and able to purchase at a given price in a specified period of time.