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%.

---

Definitions:

Probability

A measure of the likelihood of a given event occurring, often expressed as a number between 0 and 1.

Returns

Returns denote the profit or loss derived from an investment over a certain period, expressed as a percentage of the investment's initial cost.

Standard Deviation

A statistical measure of the dispersion or variability in a dataset, often used in finance to quantify the risk of an investment.

Normally Distributed

A statistical term describing a distribution of data where most of the observations cluster around the mean, forming a bell-shaped curve.