A Portfolio Is Composed of Two Stocks, a and B

question 21

Multiple Choice

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is ________.

• A) .583
• B) .225
• C) .327
• D) .128

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Definitions:

Scatter Diagram

A graphical representation using dots to show the relationship between two variables, often used to identify patterns or trends.

Nominal Variables

Variables classified into categories that cannot be ordered or ranked; they are used to label or name categories or groups.

Relationship

The manner by which two or more ideas, items, or individuals are linked, or the condition of linkage.

Scatter Diagram

A graph that shows the relationship between two variables by displaying data points on a two-dimensional plane.