Stock a Has an Expected Return of 20%, and Stock

question 40

Multiple Choice

Stock A has an expected return of 20%, and stock B has an expected return of 4%. However, the risk of stock A as measured by its variance is 3 times that of stock B. If the two stocks are combined equally in a portfolio, what would be the portfolio's expected return?

• A) 20.0%.
• B) 4.0%.
• C) 12.0%.
• D) Greater than 20%.

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Definitions:

Predicted Value Of Y

The value estimated based on a regression line for a given X value in the context of linear regression.

Simple Linear Regression Model

A statistical method that models the relationship between a dependent variable and one independent variable by fitting a linear equation to observed data.

Slope

In mathematics, the measure of the steepness, incline, or grade of a straight line, calculated as the ratio of vertical change to horizontal change between two points on the line.

Regression Analysis

A set of statistical processes for estimating the relationships among variables.