A Portfolio Is Composed of Two Stocks,A and B

question 40

Multiple Choice

A portfolio is composed of two stocks,A and B. Stock A has a standard deviation of return of 35% while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is 0.45. Stock A comprises 40% of the portfolio while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________.

• A) 23.00%
• B) 19.76%
• C) 18.45%
• D) 17.67%

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Definitions:

Random Variable

A variable whose values are outcomes of a random phenomenon.

Accurate

The degree to which the result of a measurement, calculation, or specification conforms to the correct value or a standard.

Contribution

An addition or support provided to something, often referring to the role or impact one element brings to an overall outcome or project.

Binomial Random Variable

A type of random variable that results from a binomial experiment, defined by a fixed number of trials, two possible outcomes per trial, constant probability of success, and independence between trials.