Stock X Has a Beta of 0

question 42

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) The required return on Portfolio P is equal to the market risk premium (rM - rRF).
• B) Portfolio P has a beta of 0.7.
• C) Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, rRF.
• D) Portfolio P has the same required return as the market (rM).

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Definitions:

Clean Air

The condition of the atmosphere when it is free from pollutants, contaminants, and other harmful substances.

Network Externality

The effect that an additional user of a good or service has on the value of that product to others, often increasing the utility as more people use it.

Elastic

Refers to the responsiveness of the quantity demanded or supplied of a good to a change in its price.

Inelastic

Describes a situation where a change in the price of a good or service has a relatively small effect on the quantity demanded or supplied.