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