Question
13a) Consider Stocks A and B. The two stocks have a correlation (of returns) of 40%. The expected return of Stocks A and B (i.e.
13a) Consider Stocks A and B. The two stocks have a correlation (of returns) of 40%. The expected return of Stocks A and B (i.e. the fair discount rates), are 8.2% and 12.2% respectively measured as an EAR. The annualized volatility of Stock A is 45%. The annualized volatility of Stock B is 80%. Which of the following statements are true once the two stocks are combined into a two-asset portfolio? (1) The annualized volatility of the portfolio will be equal to the arithmetic average of the annualized volatility of stocks A and B. (2) The annualized volatility of the portfolio will be less than the arithmetic average of the annualized volatility of stocks A and B. (3) The expected return of the portfolio will be equal to the arithmetic average of the expected returns of stocks A and B. (4) The expected return of the portfolio will be less than the arithmetic average of the expected returns of stocks A and B. (5) Both (1) and (3) are correct. (6) Both (1) and (4) are correct. (7) Both (2) and (3) are correct. (8) Both (2) and (4) are correct. (9) All of the above are incorrect. Enter a value from 1 to 9 to reflect your answer.
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