Question

Consider the following information for three stocks, A, B, and C. The stocks' returns are positively but not perfectly positively correlated with one another, i.e., the correlations are all between O and 1 ExpectedStandard Stock Retum Deviation Beta 1.0 10% 1.0 1.4 10% B10% 12% 20% 12% Portfolio AB has half of its funds invested in Stock A and half in Stock B. Portfolio ABC has one third of its funds invested in each of the three stocks. The risk-free rate is 5%. and the market is in equilibrium, so required returns equal expected returns. Which of the following statements is CORRECT? Select one 0 a. I am not sure. O b. Portfolio AB's coefficient of variation is greater than 2.0 O c. Portfolio ABC's expected return is 10.66667%. d. Portfolio AB's required return is greater than the required return on Stock A e-Portfolio AB has a standard deviation of 20%

Answer 1

Portfolio Return is equal to the weighted average return

Hence, return on portfolio AB = (10%+10%)/2 = 10% i.e. equal to required return on Stock A

Return on Portfolio ABC = (10%+10%+12%)/3 = 10.66667%

The standard deviation of portfolio AB will be lower than 20% since the portfolios are not perfectly correlated

Hence, the correct statement and the answer is C.