Stock a Has an Expected Return of 12%, a Beta

question 100

Multiple Choice

Stock A has an expected return of 12%, a beta of 1.2, and a standard deviation of 20%.Stock B also has a beta of 1.2, but its expected return is 10% and its standard deviation is 15%.Portfolio AB has $300,000 invested in Stock A and $100,000 invested in Stock B.The correlation between the two stocks' returns is zero (that is, r_A,B = 0) .Which of the following statements is CORRECT?

• A) The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is overvalued.
• B) The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is undervalued.
• C) Portfolio AB's expected return is 11.0%.
• D) Portfolio AB's beta is less than 1.2.
• E) Portfolio AB's standard deviation is 17.5%.

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Definitions:

Primary Tool

The main instrument or device used to accomplish a task or achieve a goal.

Market Value Ethics

A principle that considers ethical actions in the marketplace as those that maximize the value for all stakeholders involved.

Utilitarianism

is an ethical theory that suggests the best action is the one that maximizes utility, usually defined as that which produces the greatest well-being of the greatest number of people.

Ethical Relativism

The belief that morality is relative to the norms of one's culture, meaning that what is considered moral in one society may be considered immoral in another.