Stock a Has an Expected Return of 12%,a Beta of 1.2,and

question 14

Multiple Choice

Stock A has an expected return of 12%,a beta of 1.2,and a standard deviation of 20%.Stock B also has a beta of 1.2,but its expected return is 10% and its standard deviation is 15%.Portfolio AB has $900,000 invested in Stock A and $300,000 invested in Stock B.The correlation between the two stocks' returns is zero (that is,rA,B = 0) .Which of the following statements is CORRECT?

• A) Portfolio AB's standard deviation is 17.5%.
• B) The stocks are not in equilibrium based on the CAPM;if A is valued correctly,then B is overvalued.
• C) The stocks are not in equilibrium based on the CAPM;if A is valued correctly,then B is undervalued.
• D) Portfolio AB's expected return is 11.0%.
• E) Portfolio AB's beta is less than 1.2.

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Definitions:

Halogens

A group of elements found in Group 17 of the periodic table, known for their reactivity and usefulness in many chemical reactions.

Monochlorinated Products

Chemical compounds resulting from the addition of one chlorine atom to a molecule, often in organic chemistry reactions.

Cyclopentane

A cyclic hydrocarbon with the chemical formula C5H10, having a ring of five carbon atoms, used as a solvent and in the synthesis of rubber.

Monobrominated Product

A compound resulting from the introduction of a single bromine atom into an organic molecule, often used in chemical synthesis.