Stocks A, B, and C Are Similar in Some Respects

question 10

Multiple Choice

Stocks A, B, and C are similar in some respects: Each has 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%.
• E) Portfolio AC has an expected return that is less than 10%.

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Definitions:

Fair Representation

The principle that every member of a group has the right to equal and impartial representation, often applied in legal contexts and union operations.

Near-Privity Rule

A legal doctrine allowing a non-contractual party who is closely related to a contractual agreement to assert rights or claims under that contract.

Audit

A systematic examination of books, accounts, documents, and vouchers of an organization to ascertain how far the financial statements present a true and fair view of the concern.

Negligence

The failure to use that amount of care that a reasonably prudent person would have used under the same circumstances and conditions.