Stock Stock X Stock Y Portfolio Weight 0.75 0.25 Expected Return 18.0% 1 1 .096

Question

Stock Stock X Stock Y Portfolio Weight 0.75 0.25 Expected Return 18.0% 1 1 .096 Standard Deviation 35.0% 35.0% What is the portfolio's expected return? 16.25% 15.55% 13.80% 12.75% 14.15% O Suppose Stocks X and Y are perfectly, positively correlated (r1). What is the portfolio's standard deviation of returns? O 50% 2090 35% 7096 0% If you added randomly selected stocks to the portfolio, the portfolio's standard deviation would If a portfolio has no firm-specific risk remaining, which of the following is the best estimate of the standard deviation of returns? O 70% 3596 O 50% 096 20% The tradeoff between risk and return is a cornerstone concept in finance. If a security offers a higher expected return, it must have higher risk. Look at the two stocks described in this problem. They have the same risk, but one stock has a higher expected return. Does this example contradict the tradeoff between risk and return? O No

Explanation / Answer

If you add randomly selected stock standard deviation will decrease

If no firm specific risk Standard deviation = 35%



Yes it contradicts. With same return there should be same standard deviation

X 0.75 18% 35% Y 0.25 11% 35% Expected return 16.25% Standard Dev 35.00% 0.06890625 0.00765625 0.0459375 0.1225

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