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

question 92

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,r_M - r_RF,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%.

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Definitions:

Average Outgoing Quality

The average quality level of products after defective items have been removed through screening or quality control procedures.

Inspection

A means of ensuring that an operation is producing at the quality level expected.

Specific Causes

Unique factors or circumstances that can lead to specific outcomes or effects, distinguished from general or common causes.

Acceptance Sampling

A statistical quality control method where a random sample of items from a lot is inspected to decide if the whole lot should be accepted or rejected.