Richard has two investment opportunities. He can invest in The Sunglas

Richard has two investment opportunities. He can invest in The Sunglasses Company or The Umbrella Company.

If he diversifies his investment by putting 50% of his money into each company, what is the expected return and standard deviation of his portfolio?

State of the Economy Probability of the State Expected Return Sunglasses Company Expected Return
Umbrella Company
Sunny .50 25% 0%
Rainy .50 0% 25%

A) The expected return for the portfolio is 12.50% and the standard deviation 0.00%.
B) The expected return for the portfolio is 25.00% and the standard deviation 0.00%.
C) The expected return for the portfolio is 12.50% and the standard deviation 12.50%.
D) The expected return for the portfolio is 25.00% and the standard deviation 25.00%.

ANSWER

Answer: A
Explanation: A) The expected return is 12.50% in each state of the world, so the standard deviation is 0.0.