CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

You are considering a portfolio only of long positions not involving leverage and have the following information:

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
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