Suppose You Plan to Create a Portfolio with Two Securities

question 100

Multiple Choice

Suppose you plan to create a portfolio with two securities: Rolie and Polie.Rolie has an expected return of 6 percent with a standard deviation of 5 percent.Polie has an expected return of 18 percent with a standard deviation of 15 percent.The correlation between the returns of these two securities is perfectly negative.What percentage of your investment should be in Polie to make the portfolio risk free? What would be the expected return on the portfolio?

• A) Portfolio weight in Polie = 25%; expected return on the portfolio = 9.00%
• B) Portfolio weight in Polie = 40%; expected return on the portfolio = 10.80%
• C) Portfolio weight in Polie = 60%; expected return on the portfolio = 13.20%
• D) Portfolio weight in Polie = 75%; expected return on the portfolio = 15.00%

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Definitions:

Critical Value

The threshold or point on the test distribution that is compared with the test statistic to determine whether to reject the null hypothesis.

T Value

A statistic used in hypothesis testing to determine if there is a significant difference between two groups.

Test Statistic

A value calculated from sample data that is used in a hypothesis test to determine whether to reject the null hypothesis.

Degrees Of Freedom

The number of independent values or quantities which can be assigned to a statistical distribution or calculation.