Portfolio P Has $200,000 Consisting of $100,000 Invested in Stock

question 4

Multiple Choice

Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock B. Stock A has a beta of 1.2 and a standard deviation of 20%. Stock B has a beta of 0.8 and a standard deviation of 25%. Which of the following statements is CORRECTσ (Assume that the stocks are in equilibrium.)

• A) stock b has a higher required rate of return than stock a.
• B) portfolio p has a standard deviation of 22.5%.
• C) more information is needed to determine the portfolio's beta.
• D) portfolio p has a beta of 1.0.
• E) stock a's returns are less highly correlated with the returns on most other stocks than are b's returns.

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Definitions:

Capital Employed

The total amount of capital used for the acquisition of profits by a firm or project, including assets and working capital.

Debt

An obligation owed by one party to a second party; in financial terms, it typically refers to money borrowed by one party from another.

Capital Employed

Capital employed refers to the total amount of capital used for the acquisition of profits by a firm or project. It is typically the value of all assets employed in a business.

ROCE

Return on Capital Employed; a financial ratio that measures a company's profitability and the efficiency with which its capital is employed.