Asked by
Keeper Simeon
on Nov 28, 2024
Verified
Stocks A,B,and C all have an expected return of 10% and a standard deviation of 25%.Stocks A and B have returns that are independent of one another,i.e.,their correlation coefficient,r,equals zero.Stocks A and C have returns that are negatively correlated with one another,i.e.,r is less than 0.Portfolio AB is a portfolio with half of its money invested in Stock A and half in Stock B.Portfolio AC is a portfolio with half of its money invested in Stock A and half invested in Stock C.Which of the following statements is correct?
A) Portfolio AC has an expected return that is greater than 25%.
B) Portfolio AB has a standard deviation that is greater than 25%.
C) Portfolio AB has a standard deviation that is equal to 25%.
D) Portfolio AC has a standard deviation that is less than 25%.
Standard Deviation
A measure of the dispersion or variability in a set of values, indicating how much the values differ from the mean of the set.
Expected Return
The anticipated return on an investment, taking into account the probabilities of each possible outcome.
Independent
Free from external control and constraint, or in finance, referring to analysis or advice that is unbiased by conflicts of interest.
- Utilize the fundamentals of portfolio diversification to perceive its influence on decreasing risk.
- Identify the distinctions between market risk, known as systematic risk, and diversifiable risk, referred to as unsystematic risk.
Verified Answer
VB
Learning Objectives
- Utilize the fundamentals of portfolio diversification to perceive its influence on decreasing risk.
- Identify the distinctions between market risk, known as systematic risk, and diversifiable risk, referred to as unsystematic risk.