An analyst is examining the following two-stock portfolio:

Stock Portfolio Weight Expected Return Standard Deviation

Stock X .30 18% 35% Stock Y .70 11% 35%

What is the portfolio's expected return?

13.1% 14.15% 13.8% 15.2% 16.25%

If randomly selected stocks are added to the portfolio until the portfolio has no asset-specific risk remaining, which of the following is the best estimate of the portfolio's standard deviation of returns?

0% 50% 20% 35% 70%

The tradeoff between risk and return is a cornerstone concept in finance. If a security offers a higher expected return, it must have higher risk. Look at the two stocks described in this problem. They have the same risk, but one stock has a higher expected return. Does this example contradict the tradeoff between risk and return?

Yes No