Consider the Following Information for Three Stocks, A, B, and C

question 74

Multiple Choice

Consider the following information for three stocks, A, B, and C. The stocks' returns are positively but not perfectly positively correlated with one another, i.e., the correlations are all between 0 and 1. $\begin{array}{llcc}&\text { Expected }&\text {Standard }\\\underline{ \text { Stock }}&\underline{ \text { Return }}&\underline{ \text { Deviation} }&\underline{ \text { Beta} }\\\text { A } & 10 \% & 20 \% & 1.0\\ \text {B} & 10 \% & 10 \% & 1.0 \\\text { C } & 12 \% & 12 \% & 1.4 \end{array}$

Portfolio AB has half of its funds invested in Stock A and half in Stock B. Portfolio ABC has one third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium, so required returns equal expected returns. Which of the following statements is CORRECT?

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Definitions:

Contingent Consideration

Payment in an acquisition that is dependent on specific future events possibly occurring, such as meeting performance targets.

Contingent Consideration

An additional payment that the buyer agrees to make to the seller in a business acquisition, which is dependent on specific future events or performances.

Fair Value

An estimate of the price at which an asset or liability could be exchanged between knowledgeable, willing parties in an arm's length transaction.

Liability

A financial obligation or debt owed by a company to another entity.