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:

Midpoint Method

A technique used in economics to measure the elasticity of a variable without the influence of the starting and ending points.

Price Elasticity

A measure of how sensitive the quantity demanded of a good is to a change in its price.

Quantity Demanded

The overall volume of a good or service buyers are prepared and capable of acquiring at a designated price during a specified period.

Time Horizon

The length of time over which an investment or a project is intended or expected to occur.