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Corporate Finance · End Term · 21 Dec 2025 · September 2025 term

Question 26: Security A has an expected return of 14% and a standard …

Question 26

+4 marksOne or more correct options

Security A has an expected return of 14% and a standard deviation of 20%. Security B has an expected return of 18% and a standard deviation of 25%. Suppose that the rates of return of the two securities have a correlation coefficient of 0.8. Based on the given information select the correct statements from below.

Select all that apply.

  1. A

    The covariance of security A and security B is 1.5%.

  2. B

    If an investor invests 50% of wealth in each security, then his portfolio’s expected return is 16%.

  3. C

    If an investor invests 50% of wealth in each security, then his portfolio’s standard deviation is 21.36%.

  4. D

    If short selling is not allowed, it is not possible to build a portfolio with expected return of 20%.

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Correct answers

  • B

    If an investor invests 50% of wealth in each security, then his portfolio’s expected return is 16%.

  • C

    If an investor invests 50% of wealth in each security, then his portfolio’s standard deviation is 21.36%.

  • D

    If short selling is not allowed, it is not possible to build a portfolio with expected return of 20%.

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Question 26 of 30 in the IIT Madras BS Corporate Finance (Corporate Finance) End Term paper sat on 21 Dec 2025, in the September 2025 term (Corporate Finance 18 Dec 25). It carries 4 marks.

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