Stock a Has an Expected Return of 10% and a Standard

question 22

Multiple Choice

Stock A has an expected return of 10% and a standard deviation of 20%. Stock B has an expected return of 13% and a standard deviation of 30%. The risk-free rate is 5% and the market risk premium, rM - rRF, is 6%. Assume that the market is in equilibrium. Portfolio AB has 50% invested in Stock A and 50% invested in Stock B. The returns of Stock A and Stock B are independent of one another, i.e., the correlation coefficient between them is zero. Which of the following statements is correct?

• A) Stock A's beta is 0.8333.
• B) Since the two stocks have zero correlation, Portfolio AB is riskless.
• C) Stock B's beta is 1.0000.
• D) Portfolio AB's required return is 11%.

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Definitions:

Post-It

A small piece of paper with a re-adherable strip of glue on its back, made for temporarily attaching notes to documents and other surfaces.

Text Messages

Written electronic messages sent over a phone or computer network, typically consisting of short messages between two or more parties.

Noise

Unwanted sound, or a distraction that interferes with the communication process.

Deviation

A departure from a standard or norm, which can indicate variability in statistical data, processes, or behaviors.