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Stocks A and B each have an expected return of 12%, a beta of 1.2, and a standard deviation of 25%. The returns on the two stocks have a correlation of +0.6. Portfolio P has 50% in Stock A and 50% in Stock B.
Which of the following statements is correct?
a. Portfolio P has a beta that is greater than 1.2.
b. Portfolio P has a standard deviation that is greater than 25%.
c. Portfolio P has an expected return that is less than 12%.
d. Portfolio P has a standard deviation that is less than 25%.
e. Portfolio P has a beta that is less than 1.2.

Respuesta :

Answer: d. Portfolio P has a standard deviation that is less than 25%

Explanation:

This answer is correct because whenever 2 stocks have a correlation of less than 1 , a portfolio consisting of these 2 stocks will always have a standard deviation less than the standard deviation of the stocks standard deviation added according to their weight in the portfolio, so in this case both stocks have a weight of 50% and standard deviation of 25% so their sum will be

(0.5*25%) +( 0.5*25%)= 25%, so the portfolio standard deviation will be less than 25%.

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