Stocks A, B, and C all have an expected return of 10% and a standard deviation of 25%. Stocks A and B have returns that are independent of one another, i.e., their correlation coefficient, r, equals zero. Stocks A and C have returns that are negatively correlated with one another, i.e., r is less than 0. Portfolio AB is a portfolio with half of its money invested in Stock A and half in Stock B. Portfolio AC is a portfolio with half of its money invested in Stock A and half invested in Stock C. Which of the following statements is CORRECT?
A. Portfolio AC has an expected return that is less than 10%.
B. Portfolio AC has an expected return that is greater than 25%.
C. Portfolio AB has a standard deviation that is greater than 25%.
D. Portfolio AB has a standard deviation that is equal to 25%.
E. Portfolio AC has a standard deviation that is less than 25%.
Answer: E
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