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:

Actual Profit

The realised gain from business operations or investments, after all costs and expenses have been deducted.

Payoff Table

A tabular representation of the possible outcomes or payoffs in a decision-making problem, against various decisions under different states of nature.

State of Nature

In decision making and statistics, the actual but unknown condition affecting outcomes or probabilities.

Monetary Values

The value of an object, service, or resource expressed in terms of money or currency.