- CFA Exams
- CFA Level I Exam
- Study Session 18. Portfolio Management (1)
- Reading 53. Portfolio Risk and Return: Part II
- Subject 2. Pricing of Risk and Computation of Expected Return
CFA Practice Question
You are considering a portfolio only of long positions not involving leverage and have the following information:
2 | 18% | 64 | R1,3 = 0.2
3 | 24% | 400 | R2,3 = -1.0
Stock | Expected Return | Variance | Correlation
1 | 15% | 100 | R1,2 = 0.6
2 | 18% | 64 | R1,3 = 0.2
3 | 24% | 400 | R2,3 = -1.0
Which of the following statements is supported by the above data?
A. The highest expected return for any portfolio using these three stocks is 15%.
B. The boundaries for expected return for any portfolio using these three stocks are 0% and 24%.
C. The expected return on the portfolio would be 19%, with equal weights in each of the three stocks.
Explanation: 19% = (15% + 18% + 24%)/3
User Contributed Comments 2
| User | Comment |
|---|---|
| lighty0770 | I am not sure I agree with this, if there was no information about correlation I would agree, however, if stock 2 and stock 3 have a perfectly negative correlation how could you theoretically generate a positive return in both #2 and #3? |
| myron | But you have 3 stocks in the portfolio, not 2, @lighty0770 |