Charlie and Lucinda Each Have $50,000 Invested in Stock Portfolios

question 75

Multiple Choice

Charlie and Lucinda each have $50,000 invested in stock portfolios.Charlie's has a beta of 1.2, an expected return of 10.8%, and a standard deviation of 25%.Lucinda's 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 Charlie's and Lucinda's portfolios is zero.If Charlie and Lucinda marry and combine their portfolios, which of the following best describes their combined $100,000 portfolio?

• A) 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%.
• B) 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%.
• C) The combined portfolio's standard deviation will be greater than the simple average of the two portfolios' standard deviations, 25%.
• D) The combined portfolio's standard deviation will be equal to a simple average of the two portfolios' standard deviations, 25%.
• E) 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%.

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Definitions:

Pay-For-Performance

Pay-For-Performance is a compensation strategy where employees' compensation is directly linked to their performance or achievements.

Organizational Productivity

The measure of how efficiently and effectively an organization uses its resources to achieve its goals.

Gain Sharing

A performance-based compensation model where employees receive bonuses or rewards based on the productivity improvements or successes of their organizational unit.

Skill-Based Pay

A compensation system that rewards employees for the skills and knowledge they possess, rather than the position they hold.