Stock a Has an Expected Return of 12%,a Beta of 1.2,and

question 40

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,an expected return of 10%,and a standard deviation of 15%.Portfolio AB has $900,000 invested in Stock A and $300,000 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.

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Definitions:

Contractor's Bid

A proposal offered by a contractor to perform a specific job or project at a defined price and under certain conditions.

Enforceable

A term used to describe a legal document, such as a contract or agreement, that can be upheld or compelled by law.

Assumes The Risk

A legal principle stating that a person voluntarily exposes themselves to known hazards, accepting any incurred harm or loss.

Future

In a general context, 'future' refers to the time or a period of time following the moment of speaking or writing; in finance, it often pertains to a contract to buy or sell an asset at a later date.