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

question 62

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 portfolioσ

• 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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