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:

Coin Flipped

A metaphorical expression used to describe an event that has an equal probability of occurring in one of two ways.

Probability

A measure of the likelihood that an event will occur.

Heads

In the context of coin tosses, it refers to one of the two possible outcomes where the side of the coin showing the head is facing up.

Method Of Equal Alternatives

A problem-solving technique that involves systematically comparing different solutions or options.