The stock of a technology company has an expected return of 15% and a standard deviation of 20%. The stock of a pharmaceutical company has an expected return of 13% and a standard deviation of 18%. A portfolio consisting of 50% invested in each stock will have an expected return of 14 % and a standard deviation
A) less than the average of 20% and 18%.
B) the average of 20% and 18%.
C) greater than the average of 20% and 18%.
D) The answer cannot be determined with the information given.

Question

Quizplus · Accepted Answer

The expected return of a portfolio is the weighted average of the expected returns of its components, but the standard deviation of a portfolio also depends on the correlation between the assets. Without information on correlation, we can't calculate the exact standard deviation, but it's generally less than the average of the individual standard deviations due to diversification benefits, assuming the assets are not perfectly correlated.

The Stock of a Technology Company Has an Expected Return