Stocks a and B Each Have an Expected Return of 15

question 110

Multiple Choice

Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and a beta of 1.2. The returns on the two stocks have a correlation coefficient of +0.6. Your portfolio consists of 50% A and 50% B. Which of the following statements is CORRECTσ

• A) the portfolio's expected return is 15%.
• B) the portfolio's standard deviation is greater than 20%.
• C) the portfolio's beta is greater than 1.2.
• D) the portfolio's standard deviation is 20%.
• E) the portfolio's beta is less than 1.2.

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Definitions:

Arbitrage

The simultaneous purchase and sale of the same asset in different markets to profit from unequal prices.

Profit

Profit represents the financial gain achieved when the revenues generated from business activities exceed the expenses, taxes, and costs incurred in operating the business.

Market

A medium or place where buyers and sellers conduct transactions, either physically or virtually, involving goods, services, or securities.

Financial Leverage

The application of borrowed capital to escalate the possible earnings from an investment.