Which of the Following Statements Is Correct

question 45

Multiple Choice

Which of the following statements is correct?

• A) If the returns from two stocks are perfectly positively correlated and the two stocks have equal variance,an equally weighted portfolio of the two stocks will have a variance which is less than that of the individual stocks.
• B) If a stock has a negative beta,its expected return must be negative.
• C) According to the CAPM,stocks with higher standard deviations of returns will have higher expected returns.
• D) A portfolio with a large number of randomly selected stocks will have less market risk than a single stock which has a beta equal to 0.5.
• E) None of the above statements is correct.

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Definitions:

Tax Rate

The cut of profits or earnings that governmental entities subtract as tax from companies or persons.

Debt-Equity Ratio

A measure of a company's financial leverage calculated by dividing its total liabilities by its stockholders' equity.

Pre-Tax Cost

The cost of an investment or expense before the deduction of taxation.

Unlevered Cost

The cost of capital for a company that operates without any debt, reflecting the risk of the company's equity alone.