Stock a Has a Beta of 0

question 45

Multiple Choice

Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2. Portfolio P has 1/3 of its value invested in each stock. Each stock has a standard deviation of 25%, and their returns are independent of one another, i.e., the correlation coefficients between each pair of stocks is zero. Assuming the market is in equilibrium, which of the following statements is CORRECTσ

• A) portfolio p's expected return is equal to the expected return on stock a.
• B) portfolio p's expected return is less than the expected return on stock b.
• C) portfolio p's expected return is equal to the expected return on stock b.
• D) portfolio p's expected return is greater than the expected return on stock c.
• E) portfolio p's expected return is greater than the expected return on stock b.

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Definitions:

Real Gross Domestic Product

An inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a specific period.

Planned Investment

Expenditures intended by businesses to purchase physical capital goods, which are expected to produce future benefits.

Spending Multiplier

The ratio of change in aggregate output (or income) to a change in spending that caused the change, showing how initial spending leads to increased total spending.

Autonomous Investment

Investment that does not change in response to alterations in the overall economy or income levels, such as public infrastructure investments.