Assume That the Market Is in Equilibrium and That Portfolio

question 62

Multiple Choice

Assume that the market is in equilibrium and that Portfolio AB has 50% invested in Stock A and 50% invested in Stock B.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,r_M - r_RF,is 6%.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) Since the two stocks have zero correlation, Portfolio AB is riskless.
• B) Stock B's beta is 1.0000.
• C) Portfolio AB's required return is 11%.
• D) Portfolio AB's standard deviation is 25%.
• E) Stock A's beta is 0.8333.

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Definitions:

Autonomic Arousal

The automatic activation of the nervous system that regulates bodily functions and responses to stimuli, affecting physical states associated with emotions and stress.

Schachter And Singer Theory

A psychological theory stating that emotions are determined by physiological arousal and the cognitive labeling of that arousal based on environmental cues.

James-Lange Theory

A theory of emotion suggesting that physiological arousal precedes the experience of emotion; we feel sad because we cry, angry because we strike, afraid because we tremble.

Basic Emotions

Fundamental emotions that are universally recognised and experienced by all humans regardless of culture, including happiness, sadness, fear, disgust, anger, and surprise.