Consider the following information for three stocks, A,B,and C, and portfolios of these stocks. The stocks' returns are positively but not perfectly positively correlated with one another ... the correlation coefficients are all between 0 and 1
Stock Expected Standard Deviation Beta
Stock A 10% 20% 1.0
Stock B 10 10 1.0
Stock C 12 12 1.4
Portfolio AB has half of its fund invested in Stock A and half of in Stock B. Portfolio ABC has 1/3 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 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 that the required return on Stock A
D. Portfolio ABC's expected return is 10.67%
E. Portfolio ABC has a standard deviation of 20%
Please show how you obtained the answer.
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