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:

Mutual Mistake

A situation in legal contracts where all parties involved have misconceptions about a vital fact at the time of agreement.

Disclaimer

A statement that denies something, especially responsibility.

Negligent Misrepresentation

A false statement made carelessly that induces another party to enter into a contract, resulting in harm or loss.

Fraudulent Misrepresentation

A false statement made knowingly or recklessly designed to induce another party to enter into a contract.