Stock X Has a Beta of 0

question 16

Multiple Choice

Stock X has a beta of 0.7 and Stock Y has a beta of 1.3. The standard deviation of each stock's returns is 20%. The stocks' returns are independent of each other, i.e., the correlation coefficient, r, between them is zero. Portfolio P consists of 50% X and 50% Y. Given this information, which of the following statements is CORRECT?

• A) Portfolio P has a standard deviation of 20%.
• B) The required return on Portfolio P is equal to the market risk premium (rM − rRF).
• C) Portfolio P has a beta of 0.7.
• D) Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, rRF.
• E) Portfolio P has the same required return as the market (rM).

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Definitions:

Pearson's Correlation Coefficient

A measure of the strength and direction of a linear relationship between two continuous variables, computed as the covariance of the variables divided by the product of their standard deviations.

Ordinal

A term referring to a type of data or a scale of measurement where items are ranked in order but the differences between rank positions are not necessarily equidistant.

Partial Correlation

A measure of the degree of association between two variables while holding one or more other variables constant.

Third Variable

An unmeasured variable that may influence or confound the relationship between the two variables of interest in a study.