Stock a Has an Expected Return of 12%,a Beta of 1.2,and

question 14

Multiple Choice

Stock A has an expected return of 12%,a beta of 1.2,and a standard deviation of 20%.Stock B also has a beta of 1.2,but its expected return is 10% and its standard deviation is 15%.Portfolio AB has $900,000 invested in Stock A and $300,000 invested in Stock B.The correlation between the two stocks' returns is zero (that is,rA,B = 0) .Which of the following statements is CORRECT?

• A) Portfolio AB's standard deviation is 17.5%.
• B) The stocks are not in equilibrium based on the CAPM;if A is valued correctly,then B is overvalued.
• C) The stocks are not in equilibrium based on the CAPM;if A is valued correctly,then B is undervalued.
• D) Portfolio AB's expected return is 11.0%.
• E) Portfolio AB's beta is less than 1.2.

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Definitions:

General Adaptation Syndrome

A three-phase response pattern to stress described by Hans Selye, including alarm, resistance, and exhaustion stages.

Stress

The body's response to any demand or challenge, which can be physical, mental, or emotional in nature.

Acculturative Stress

The psychological impact of adapting to a new culture, which can include feelings of loss, confusion, and conflict between cultural norms.

Epinephrine

A hormone and neurotransmitter also known as adrenaline, involved in regulating heart rate, blood vessel and air passage diameters, and metabolic shifts; its release is crucial in the body's acute stress response.