Asset 1 Has an Expected Return of 10% and a Standard

question 83

Multiple Choice

Asset 1 has an expected return of 10% and a standard deviation of 20%.Asset 2 has an expected return of 15% and a standard deviation of 30%.The correlation between the two assets is less than 1.0.You form a portfolio by investing half of your money in asset 1 and half in asset 2.Which of the following best describes the expected return and standard deviation of your portfolio?

• A)The expected return is 12.5% and the standard deviation is less than 25%.
• B)The expected return is between 10% and 15% and the standard deviation is greater than 30%.
• C)The expected return is 12.5% and the standard deviation is 25%.
• D)The expected return is 12.5% and the standard deviation is greater than 25%.

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Definitions:

Required Rate

The minimum return that investors demand for investing in a particular asset, reflecting the risk of the investment.

Discounted Payback Period

A capital budgeting method that calculates the amount of time needed to break even from an investment in present value terms, factoring in the time value of money.

Discount Rate

In discounted cash flow analysis, it's the rate of interest used for calculating the present day value of future financial inflows.

Cash Flows

The sum of all money transactions both incoming and outgoing in an establishment, affecting its ability to maintain liquid resources.