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Q1. Which of the following statements about the portfolio is true? a. The expected return of...

Q1. Which of the following statements about the portfolio is true?

a. The expected return of a portfolio is NOT the weighted average of the expected returns of all individual stocks in the portfolio.

b. The standard deviation of a portfolio is NOT the weighted average of the standard deviations of all individual stocks in the portfolio.

c. Portfolio beta is NOT the weighted average of the beta values of all individual stocks in the portfolio

Q2. Which of the following transactions will affect a firm's retained earnings?

a. quarterly dividend payments

b. stock split

c. stock dividend

d. Reverse stock split
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Homework Answers

Answer #1

Q.1 : b : The standard deviation of a portfolio is NOT the weighted average of the standard deviations of all individual stocks in the portfolio.

The above statement is true because to find standard deviation of portfolio, we also need covariance between the stocks with the weighted average.

The formula is : If there are 2 stocks, portfolio standard deviation is : WA^2*SDA^2 + WB^2*SD^2 + 2*WA*WB*COVARIANCE

Other 2 statements are correct as both are weighted average.

Q.2 : c : STOCK DIVIDEND

When company issues stock dividend, it is issued at current price. So whatever price exceeds the par value will be adjusted against retained earnings.

All other do not affect the retained earnings. (Thumbs up please)

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