Security A's Expected Return Is 10%, While the Expected Return

question 5

Multiple Choice

Security A's expected return is 10%, while the expected return of B is 14%. The standard deviation of A's returns is 5%, and it is 9% for B. An investor plans to invest equal amounts in A and B. Which of the following statements is true about this portfolio consisting of stock A and stock B?

• A) The risk of the portfolio is equal to 7%.
• B) The lower the correlation of returns between the two stocks, the higher the portfolio's risk.
• C) The risk of the portfolio is primarily dependent on the utility function of the investor.
• D) The higher the correlation of returns between the two stocks, the higher the portfolio's risk.

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Definitions:

Third-Country National

An employee who is a citizen of one country, working in a second country, and employed by an organization headquartered in a third country.

Home-Country National

A term referring to employees who are working in their country of origin.

Hammer

A tool with a heavy head and a handle, used for breaking things or driving in nails.

Home-Country Nationals

Employees who are citizens of the country where their company is headquartered, even if they work abroad.