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

question 81

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,r_M - r_RF,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%.
• E) Portfolio AB's standard deviation is 25%.

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Definitions:

Mechanical Energy

The sum of potential and kinetic energy in physical systems, often involved in performing work or causing motion.

Kinetic Energy

The energy that an object possesses due to its motion, which is dependent on the mass of the object and the square of its velocity.

Heat Energy

Energy that results from the random movement of atoms, ions, or molecules; the greater the amount of heat energy in an object, the higher the object’s temperature.

Reversible Reactions

Chemical reactions that can proceed in both the forward and backward directions under certain conditions, achieving a state of equilibrium.