Question

Suppose stock A has an expected return of 4% and a volatility of 20%, whereas stock B has an expected return of 7% and a volatility of 30%. Which one of the following portfolios could be on the entire economy’s efficient frontier?

Group of answer choices

One with expected return of 5% and a volatility of 20%

One with expected return of 5% and a volatility of 30%

One with expected return of 4% and a volatility of 25%

One with expected return of 6% and a volatility of 35%

Answer 1

The correct answer is option A i.e. One with expected return of 5% and a volatility of 20%

option B cannot be correct since, with same return volatility of option B is higher

option C cannot be correct since with same return, stock B has lower volatility and option B has higher volatility

Option D cannot be correct since if is offering less return with higher volatilty as compare to stock B

Thus, option A i.e. One with expected return of 5% and a volatility of 20% is correct

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