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.

---

Definitions:

Restless

A state of unease or inability to remain still or silent, often resulting in constant movement or the desire to be moving.

Nasogastric (NG) Tube

A medical device inserted through the nose into the stomach for feeding or medication administration.

Bowel Obstruction

A blockage that prevents food or liquid from passing through the small intestine or large intestine (colon).

Low Gomco

A reference to a low suction setting on a Gomco clamp, a device commonly used in medical procedures like circumcision.