Assume That the Market Is in Equilibrium and That Portfolio

question 28

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, rM σ rRF, 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:

Cyclohexane

A colorless, flammable liquid with a distinctive detergent-like smell, commonly used as an organic solvent and a precursor to nylon.

Aromatic

Relates to organic compounds that contain one or more benzene rings or similar ring structures, characterized by a distinct smell and stability.

Fragrant

Fragrant refers to having a pleasant or sweet smell, commonly associated with flowers, plants, and certain chemical compounds.

Cyclohexane

A saturated hydrocarbon with the chemical formula C6H12, commonly used as a solvent or in the manufacture of other chemicals.