An analyst is examining the following two-stock portfolio:

Stock             Portfolio Weight               Expected Return              Standard Deviation

Stock X             .30                                   18%                                 35%

Stock Y             .70                                   11%                                 35%

What is the portfolio's expected return?

13.1%

14.15%

13.8%

15.2%

16.25%

If randomly selected stocks are added to the portfolio until the portfolio has no asset-specific risk remaining, which of the following is the best estimate of the portfolio's standard deviation of returns?

0%

50%

20%

35%

70%

The tradeoff between risk and return is a cornerstone concept in finance. If a security offers a higher expected return, it must have higher risk. Look at the two stocks described in this problem. They have the same risk, but one stock has a higher expected return. Does this example contradict the tradeoff between risk and return?

Yes

No