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

question 87

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, rM − rRF, 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:

Tax

A fundamental fiscal obligation or alternative sort of levy placed upon a taxpayer by a government power, promoting government funding and assorted investments in public infrastructure.

Consumer Surplus

The difference between the maximum price a consumer is willing to pay for a good or service and the actual price they do pay, reflecting the economic benefit obtained by consumers.

Tax Revenue

Tax revenue represents the income that a government receives from taxing individuals and businesses within its jurisdiction.

Equilibrium Quantity

The quantity of goods or services that is supplied and demanded at the equilibrium price, where supply equals demand in a market.