Stocks A,B,and C All Have an Expected Return of 10

question 87

Multiple Choice

Stocks A,B,and C all have an expected return of 10% and a standard deviation of 25%.Stocks A and B have returns that are independent of one another,i.e.,their correlation coefficient,r,equals zero.Stocks A and C have returns that are negatively correlated with one another,i.e.,r is less than 0.Portfolio AB is a portfolio with half of its money invested in Stock A and half in Stock B.Portfolio AC is a portfolio with half of its money invested in Stock A and half invested in Stock C.Which of the following statements is correct?

• A)Portfolio AC has an expected return that is greater than 25%.
• B)Portfolio AB has a standard deviation that is greater than 25%.
• C)Portfolio AB has a standard deviation that is equal to 25%.
• D)Portfolio AC has a standard deviation that is less than 25%.

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