An Investor Can Design a Risky Portfolio Based on Two

question 7

Multiple Choice

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is 0.50. The risk-free rate of return is 10%.
-The expected return on the optimal risky portfolio is _________.

• A) 14.0%
• B) 15.6%
• C) 16.4%
• D) 18.0%

---

Definitions:

Direct Materials

Raw materials that are directly traceable to the production of specific goods or products.

Variable Overhead

Costs that fluctuate with production volume, such as electricity for manufacturing equipment, excluding fixed costs.

Excess Capacity

A situation where a company can produce more goods or provide more services than currently demanded, indicating unused productive potential.

Special Order

A one-time customer order often involving a large quantity and requiring a separate pricing or product specification arrangement.