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:

Carbon Dioxide

An invisible, scentless gas formed from the combustion of carbon-based substances and breathing.

Oxygen

A colorless, odorless reactive gas, the life-supporting component of the air.

Erythropoiesis

The process by which red blood cells (erythrocytes) are produced, which occurs in the bone marrow.

Erythropoietin

A hormone produced primarily by the kidneys that stimulates the production of red blood cells in response to low oxygen levels in tissues.