Consider the Following Information for Three Stocks,A,B,and C,and Portfolios of These

question 152

Multiple Choice

Consider the following information for three stocks,A,B,and C,and portfolios of these stocks.The stocks' returns are positively but not perfectly positively correlated with one another,i.e.,the correlation coefficients are all between 0 and 1.Portfolio AB has half of its funds invested in Stock A and half in Stock B.Portfolio ABC has one-third of its funds invested in each of the three stocks.The risk-free rate is 5%,and the market is in equilibrium,so required returns equal expected returns.Which of the following statements is correct? $\begin{array}{l}\begin{array}{lll}&&\text { Expected }\\\underline {\text { Stock }} & & \underline {\text { Return }} \\\text { Stock A } & & 10 \% \\\text { Stock B } & &10 \\\text { Stock C } & & 12\end{array}\begin{array}{lll}\text { Standard }\\ \underline { \text { Deviation } }& \underline { \text { Beta } }\\20 \%&1.0 \\10 &1.0\\12&1.4\end{array}\end{array}$

• A)Portfolio AB has a standard deviation of 20%.
• B)Portfolio AB's coefficient of variation is greater than 2.0.
• C)Portfolio AB's required return is greater than the required return on Stock A.
• D)Portfolio ABC's expected return is 10.67%.

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Definitions:

Neuroleptic Malignant Syndrome

A rare, but life-threatening, reaction to antipsychotic drugs characterized by fever, muscle rigidity, and autonomic dysfunction.

Motor Control

The ability to regulate or direct the mechanisms essential for movement.

Tardive Dyskinesia

A neurological disorder characterized by involuntary, repetitive movements of the face, limbs, or trunk, often as a side effect of long-term use of antipsychotic medications.

Atypical

Something that deviates from what is standard, normal, or expected.