Assume an Economy in Which There Are Three Securities: Stock

question 35

Multiple Choice

Assume an economy in which there are three securities: Stock A with rA = 10% and σA = 10%; Stock B with rB = 15% and σB = 20%; and a riskless asset with rRF = 7%. Stocks A and B are uncorrelated (rAB = 0) . Which of the following statements is most CORRECT?

• A) the expected return on the investor's portfolio will probably have an expected return that is somewhat below 10% and a standard deviation (sd) of approximately 10%.
• B) the expected return on the investor's portfolio will probably have an expected return that is somewhat below 15% and a standard deviation (sd) that is between 10% and 20%.
• C) the investor's risk/return indifference curve will be tangent to the cml at a point where the expected return is in the range of 7% to 10%.
• D) since the two stocks have a zero correlation coefficient, the investor can form a riskless portfolio whose expected return is in the range of 10% to 15%.
• E) the expected return on the investor's portfolio will probably have an expected return that is somewhat above 15% and a standard deviation (sd) of approximately 20%.

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