Stocks A, B, and C Are Similar in Some Respects

Multiple Choice

Stocks A, B, and C are similar in some respects: Each has an expected return of 10% and a standard deviation of 25%. Stocks A and B have returns that are independent of one another; i.e., their correlation coefficient, r, equals zero. Stocks A and C have returns that are negatively correlated with one another; i.e., r is less than 0. Portfolio AB is a portfolio with half of its money invested in Stock A and half in Stock B. Portfolio AC is a portfolio with half of its money invested in Stock A and half invested in Stock C. Which of the following statements is CORRECTσ

A) portfolio ac has an expected return that is greater than 25%.
B) portfolio ab has a standard deviation that is greater than 25%.
C) portfolio ab has a standard deviation that is equal to 25%.
D) portfolio ac has a standard deviation that is less than 25%.
E) portfolio ac has an expected return that is less than 10%.