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

question 81

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%.
• E) Portfolio AB's standard deviation is 25%.

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Definitions:

Market Demand Curve

A graphical representation showing the relationship between the price of a good and the total quantity of the good that all consumers in the market are willing to purchase at that price.

Profit-maximizing Output

The point of production where a company attains its maximum profit, occurring when marginal revenue is equal to marginal cost.

Tacit Collusion

Collusion occurs when price- and quantity-fixing agreements among producers are explicit. Tacit collusion occurs when such agreements are implicit.

Quantity-fixing

The determination of the quantity of a product or service to be produced or provided, often in the context of collusive agreements or regulatory mandates.