Stocks a and B Both Have an Expected Return of 10

question 100

Multiple Choice

Stocks A and B both have an expected return of 10% and a standard deviation of returns of 25%. Stock A has a beta of 0.8 and Stock B has a beta of 1.2. The correlation coefficient, r, between the two stocks is 0.6. Portfolio P has 50% invested in Stock A and 50% invested in B. Which of the following statements is CORRECT?

• A) Portfolio P has a standard deviation of 25% and a beta of 1.0.
• B) Based on the information we are given, and assuming those are the views of the marginal investor, it is apparent that the two stocks are in equilibrium.
• C) Portfolio P has more market risk than Stock A but less market risk than B.
• D) Stock A should have a higher expected return than Stock B as viewed by the marginal investor.

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