Question

Assume an economy in which there are three securities: Stock A with r _A = 10% and σ _A = 10%; Stock B with r _B = 15% and σ _B = 20%; and a riskless asset with r _RF = 7%. Stocks A and B are perfectly negativly correlated (r _AB = -1). Which of the following statements is most CORRECT?

Answers:	a. 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%.
	b. The expected return on the investor's portfolio will probably have an expected return that is somewhat below 10%.
	c. 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%.
	d. 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%.
	e. 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%.

Answer 1

ANSWER = e) Since the two stocks have a zero correlation coefficient, the investor can form a risk less portfolio whose expected return is in the range of 10% to 15%.

Stock A

r _A = 10%

σ _A = 10%

Stock B

r _B = 15%

σ _B = 20%

riskless asset

r _RF = 7%.

Stocks A and B are perfectly negatively correlated (r _AB = -1)

Two perfectly negatively correlated assets would result in Zero correlation coefficient, the investor can form a risk less portfolio whose range between (r_B to r _A)