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

question 68

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 weighted 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%.
• E) The combined portfolio's standard deviation will be equal to a simple average of the two portfolios' standard deviations,25%.

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Definitions:

VisiCalc

The first spreadsheet computer program for personal computers, which prompted the growth of the home computer as a business tool through its financial modeling capabilities.

Operating System

A program that controls computer hardware and software assets, offering universal services for various computer applications.

IBM PCs

A reference to the series of personal computers released by IBM starting in 1981, which set the standard for PC architecture.

1980

A year marked by significant events, both culturally and historically, including the eruption of Mount St. Helens and the release of the video game Pac-Man.