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

question 79

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 CORRECTσ

• 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:

Legally Owns

Possession of property, shares, or assets in accordance with the law, granting the owner the legal rights to use, sell, or modify the owned item.

Lessor

The owner of a property or asset that is leased or rented out to another party, known as the lessee.

Balance Sheet

A financial statement that provides a snapshot of a company's financial position at a specific point in time, outlining assets, liabilities, and shareholders' equity.

Current Asset

An asset that can reasonably be expected to be converted into cash, sold, or consumed within one year or the operating cycle, whichever is longer.