Final answer:
The student's question involves a portfolio with two stocks of different standard deviations in returns, focusing on investment risk and potential return. stocks carry higher risk but are expected to offer higher returns than bonds or savings accounts, justifying the additional risk.
Step-by-step explanation:
The student's question pertains to the composition of an investment portfolio that includes two stocks, A and B, with different levels of standard deviation in their returns. Stock A has a standard deviation of return of 17%, and stock B has a standard deviation of return of 23%. The portfolio allocation is 40% in stock A and 60% in stock B. Understanding this structure is fundamental in assessing the portfolio's overall risk and expected return, considering the tradeoff between risk and potential return in investment choices.
It is established that over time, stocks generally offer a higher average return than bonds or savings accounts, compensating for the higher risk associated with stocks. Therefore, investors expect a higher return for taking on additional risk. This relationship between risk and return is crucial when constructing a diversified portfolio to achieve a desired balance.