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

question 40

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 B. 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:

Limbic System

A complex system of nerves and networks in the brain, involving several areas near the edge of the cortex concerned with instinct and mood. It controls basic emotions and drives.

Emotions

Sophisticated emotional conditions that encompass an individual's internal experience, physical responses, and outward behaviors or reactions.

Cerebrum

The largest part of the brain, responsible for various higher functions like thought, action, reasoning, and creativity.

Hemispheres

Each of the two halves of the brain or the Earth, divided by either the cerebral fissure or the equator.