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:

Confidence Index

An indicator designed to measure confidence or sentiment among investors or consumers, often through surveys or economic indicators.

Bullish

It describes an investor's belief or market sentiment where the expectation is that a specific stock, asset, or market will experience an increase in value.

Bearish

A term used to describe the expectation that a particular security, market, or economy will experience a decline in value.

TRIN

The TRIN, or Trading Index, measures market breadth by dividing the advance/decline ratio by the advance/decline volume ratio.