Stock a Has a Beta of 0

question 112

Multiple Choice

Stock A has a beta of 0.8,Stock B has a beta of 1.0,and Stock C has a beta of 1.2.Portfolio P has 1/3 of its value invested in each stock.Each stock has a standard deviation of 25%,and their returns are independent of one another,i.e. ,the correlation coefficients between each pair of stocks is zero.Assuming the market is in equilibrium,which of the following statements is CORRECT?

• A) Portfolio P's expected return is greater than the expected return on Stock B.
• B) Portfolio P's expected return is equal to the expected return on Stock A.
• C) Portfolio P's expected return is less than the expected return on Stock B.
• D) Portfolio P's expected return is equal to the expected return on Stock B.
• E) Portfolio P's expected return is greater than the expected return on Stock C.

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Definitions:

Bacteria

Microscopic, single-celled organisms that exist in diverse environments and can have roles ranging from decomposing dead matter to causing disease.

Nitrogen

A chemical element with symbol N, atomic number 7; a colorless, odorless unreactive gas that forms about 78% of the earth's atmosphere and is a constituent of all living tissues.

Coriolis Effect

A deflection of moving objects when they are viewed in a rotating reference frame, often observed in the movement of air masses on Earth, influencing weather patterns and ocean currents.

Deflection

The change in direction of a wave or object due to a change in its medium or the presence of an obstacle.