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

question 73

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 CORRECT? (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:

Quadratic Model

A statistical or mathematical model in which the relationship between the independent variable and the dependent variable is represented by a second-degree polynomial or parabolic function.

Quadratic Relationship

A type of relationship between two variables where the relationship can be described by a second-degree polynomial or equation.

Significance Level

The threshold under which a result of a statistical test is considered statistically significant, often denoted by alpha (α).

Independent Variable

A variable that is manipulated to observe its effect on a dependent variable, considered the cause in cause-and-effect relationships.