Stock a Has an Expected Return of 12%, a Beta

question 32

Multiple Choice

Stock A has an expected return of 12%, a beta of 1.2, and a standard deviation of 20%. Stock B also has a beta of 1.2, but its expected return is 10% and its standard deviation is 15%. Portfolio AB has $300,000 invested in Stock A and $100,000 invested in Stock B. The correlation between the two stocks' returns is zero (that is, rA,B = 0) . Which of the following statements is CORRECTσ

• A) the stocks are not in equilibrium based on the capm; if a is valued correctly, then b is overvalued.
• B) the stocks are not in equilibrium based on the capm; if a is valued correctly, then b is undervalued.
• C) portfolio ab's expected return is 11.0%.
• D) portfolio ab's beta is less than 1.2.
• E) portfolio ab's standard deviation is 17.5%.

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