The Expected Return of Security a Is 12 Percent with a Standard

question 12

Multiple Choice

The expected return of Security A is 12 percent with a standard deviation of 15 percent.The expected return of Security B is 9 percent with a standard deviation of 10 percent.Securities A and B have a correlation of 0.4.The market return is 11 percent with a standard deviation of 13 percent and the risk-free rate is 4 percent.Which one of the following is not an efficient portfolio,as determined by the lowest Sharpe ratio?

• A) 100% invested in A is efficient
• B) 100% invested in B is efficient
• C) 41% in A and 59% B is efficient
• D) 59% in A and 41% B is efficient

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Definitions:

Contributed Capital

The total value of cash or other assets that shareholders have given a company in exchange for stock, also known as paid-in capital.

Return on Assets

A financial ratio indicating the profitability of a company relative to its total assets, measuring how effectively a company uses its assets to generate earnings.

Liabilities

Financial obligations or debts that a company or individual owes to others.

Expenses

Costs incurred in the process of generating revenue, including operating expenses, cost of goods sold, and other overheads.