Stock a Has an Expected Return of 20%, and Stock

question 31

Multiple Choice

Stock A has an expected return of 20%, and stock B has an expected return of 4%. However, the risk of stock A as measured by its variance is 3 times that of stock VB. If the two stocks are combined equally in a portfolio, what would be the portfolio's expected return?

• A) 20.0%.
• B) 4.0%.
• C) 12.0%.
• D) Greater than 20%.

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Definitions:

Unit Contribution Margin

The difference between the selling price of a single unit and its variable costs, indicating the contribution towards covering fixed costs and generating profit.

Cost-Volume-Profit Analysis

Cost-Volume-Profit Analysis is a management accounting tool that helps determine how changes in cost and volume affect a company's profit.

Curvilinear

Pertains to something shaped or moving in curved lines.

Relevant Range

The range of activity within which the assumptions about fixed and variable cost behaviors hold true.