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:

Monopoly

A market structure characterized by a single seller selling a unique product in the market with no close substitutes.

Above MR Curve

A situation where the price level of goods or services is higher than the marginal revenue that these goods or services generate.

Demand Curve

A graphical representation of the relationship between the price of a good and the quantity of the good that consumers are willing and able to purchase.

MR Curve

In economics, the marginal revenue curve shows how marginal revenue varies as quantity produced changes, critical for profit maximization decisions in firms.