Assume That the Market Is in Equilibrium and That Portfolio

question 134

Multiple Choice

Assume that the market is in equilibrium and that Portfolio AB has 50% invested in Stock A and 50% invested in Stock B.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%.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) Since the two stocks have zero correlation, Portfolio AB is riskless.
• B) Stock B's beta is 1.0000.
• C) Portfolio AB's required return is 11%.
• D) Portfolio AB's standard deviation is 25%.
• E) Stock A's beta is 0.8333.

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Definitions:

Plantwide Overhead Rate

A single rate used to allocate all of a plant's manufacturing overhead costs to its products or cost objects, regardless of the department in which the costs were incurred.

Activity-based Costing

A costing method that first assigns costs to activities and then to products based on each product’s use of activities.

Customer Orders

Requests placed by customers for the purchase of goods or services from a company.

Activity-based Costing

An accounting method that assigns costs to products or services based on the resources they consume.