Question

Which of the following will be true about the return and standard deviation of a portfolio?

• A. The return of a portfolio will be the weighted average of the returns in the portfolio, but the standard deviation will be less than the weighted average of the standard deviations in the portfolio.

• B. The return and standard deviation of a portfolio will be the weighted average of the returns and standard deviations in the portfolio.

• C. The return and standard deviation of a portfolio will be less than the weighted average of the returns and standard deviations in the portfolio.

• D. The return of a portfolio will be less than the weighted average of the returns in the portfolio, but the standard deviation will be the weighted average of the standard deviations in the portfolio.

Stock A has an expected return of 13% and a standard deviation of 22%, while Stock B has an expected return of 15% and a standard deviation of 25%. If an investor is less risk-averse, they will be likely to choose…

• A. Stock A

• B. Stock B

Answer 1

Q. 1

B. The return and standard deviation of a portfolio will be the weighted average of the returns and standard deviations in the portfolio.

Portfolio is a group of security hence its return and risk (standard deviation) should be weighted average of return and standard devaition.

Q.2

B. Stock B

The investor is less risk -averse , which means he is focus on more return hence he willing to invest Stock B.

The risk averse investor only takes more risk when he get proportionate return, he is concerned about the risk and return relationship.