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 0 and 1. 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?
A) Portfolio AB has a standard deviation of 20%.
B) Portfolio AB's coefficient of variation is greater than 2.0.
C) Portfolio AB's required return is greater than the required return on Stock A.
D) Portfolio ABC's expected return is 10.66667%.
E) Portfolio ABC has a standard deviation of 20%.

Question

Quizplus · Accepted Answer

Portfolio ABC's expected return is the weighted average of the expected returns of the three stocks, which are all equal to the risk-free rate of 5%. Therefore, Portfolio ABC's expected return is (1/3) * 5% + (1/3) * 5% + (1/3) * 5% = 10.66667%.

Consider the Following Information for Three Stocks, A, B, and C