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 standard deviation of a portfolio is determined by taking the weighted average of the individual standard deviations, which in this case would be (0.5*20%) + (0.5*18%) = 19%. Since 19% is less than the average of 20% and 18%, the correct answer is A.

The Stock of a Technology Company Has an Expected Return