Bob has a $100,000 stock portfolio with a beta of 1.5, an expected return of 14%, and a standard deviation of 22%. Becky also has a $100,000 portfolio, but it has a beta of 0.9, an expected return of 8%, and a standard deviation that is also 22%. The correlation coefficient, r, between Bob’s and Becky’s portfolios is zero. If Bob and Becky marry and combine their portfolios, which statement about their combined $200,000 portfolio is true?
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The combined portfolio’s beta will be equal to a simple average of the betas of the two individual portfolios, 1.2; its expected return will be equal to a simple weighted average of the expected returns of the two individual portfolios, 11%; and its standard deviation will be less than the simple average of the two portfolios’ standard deviations, 22%.
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The combined portfolio’s expected return will be less than the simple weighted average of the expected returns of the two individual portfolios, 11%.
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The combined portfolio’s standard deviation will be equal to the simple average of the two portfolios’ standard deviations, 22%.
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The combined portfolio’s standard deviation will be greater than the simple average of the two portfolios’ standard deviations, 22%.
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