Assume an economy in which there are three securities: Stock A with rA = 10% and σA = 10%; Stock B with rB = 15% and σB = 20%; and a riskless asset with rRF = 7%. Stocks A and B are uncorrelated (rAB = 0). Which of the following statements is most CORRECT?
A) the expected return on the investor's portfolio will probably have an expected return that is somewhat below 10% and a standard deviation (sd) of approximately 10%.
B) the expected return on the investor's portfolio will probably have an expected return that is somewhat below 15% and a standard deviation (sd) that is between 10% and 20%.
C) the investor's risk/return indifference curve will be tangent to the cml at a point where the expected return is in the range of 7% to 10%.
D) since the two stocks have a zero correlation coefficient, the investor can form a riskless portfolio whose expected return is in the range of 10% to 15%.
E) the expected return on the investor's portfolio will probably have an expected return that is somewhat above 15% and a standard deviation (sd) of approximately 20%.

Question

Quizplus · Accepted Answer

$\begin{array}{cc}
\end{array}$
$\begin{array}{l}
\begin{array} { l } 
\text { Percent A }&\text { Percent B }\
100 & 0 \
75 & 25 \
50 & 50 \
25 & 75 \
0 & 100
\end{array}
\begin{array} { l } 
r_{p} &  \sigma_{n} \
10.00 \% & 10.00 \% \
11.25 & 9.01 \
12.50 & 11.18 \
13.75 & 15.20 \
15.00 & 2000
\end{array}
\end{array}$
 
rp = xrA + (1 σ x)rB. . But σAB = 0, so, . For our investor, rp = 14.75% and σp = 14.25%.

Assume an Economy in Which There Are Three Securities: Stock