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:

Market Value Added

A calculation that shows the difference between the market value of a company and the capital contributed by investors.

Economic Value Added

A measure of a company's financial performance based on the residual wealth calculated by deducting cost of capital from its operating profit.

Negative Net Cash Flow

A financial situation where a company's cash outflows exceed its cash inflows for a specific period, indicating potential financial trouble.

Issue Of Bonds

The process by which a borrower issues bonds to lenders or investors as a way of raising capital.