- 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

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**CFA Practice Question**

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

2 | 18% | 64 | R

3 | 24% | 400 | R

Stock | Expected Return | Variance | Correlation

1 | 15% | 100 | R

_{1,2}= 0.62 | 18% | 64 | R

_{1,3}= 0.23 | 24% | 400 | R

_{2,3}= -1.0Which 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

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**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 |