Stocks a and B Both Have an Expected Return of 10

question 23

Multiple Choice

Stocks A and B both have an expected return of 10% and a standard deviation of returns of 25%.Stock A has a beta of 0.8 and Stock B has a beta of 1.2.The correlation coefficient, r, between the two stocks is 0.6.Portfolio P has 50% invested in Stock A and 50% invested in B.Which of the following statements is CORRECT?

• A) Based on the information we are given, and assuming those are the views of the marginal investor, it is apparent that the two stocks are in equilibrium.
• B) Portfolio P has more market risk than Stock A but less market risk than B.
• C) Stock A should have a higher expected return than Stock B as viewed by the marginal investor.
• D) Portfolio P has a coefficient of variation equal to 2.5.
• E) Portfolio P has a standard deviation of 25% and a beta of 1.0.

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Definitions:

Competitive Nature

Refers to the inherent characteristics of businesses or markets where entities compete against each other to gain customers, market share, or achieve a competitive advantage.

Vertical Merger

A merger between two or more companies operating at different levels within an industry's supply chain, aimed at creating more synergies or reducing costs.

Competitor

A person or entity that competes with another, particularly in business or in the offering of goods and services.

Capital Structure

Capital structure is the mixture of a company's long-term debt, specific short-term debt, common equity, and preferred equity which finance its overall operations and growth.