Stocks a and B Both Have an Expected Return of 10

question 33

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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