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:

Inventory

The total amount of goods and materials held by a company intended for sale or used in the production of goods sold.

Optimal Current Asset Holdings

Refers to the ideal mix of cash and other current assets a company maintains to meet its operational and investment needs effectively and efficiently.

Flexible Policy

A strategy or approach that can be adjusted easily in response to changing circumstances, often applied in economic or business contexts.