Stock a Has a Beta of 0

question 112

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 CORRECT?

• A) Portfolio P's expected return is greater than the expected return on Stock B.
• B) Portfolio P's expected return is equal to the expected return on Stock A.
• C) Portfolio P's expected return is less than the expected return on Stock B.
• D) Portfolio P's expected return is equal to the expected return on Stock B.
• E) Portfolio P's expected return is greater than the expected return on Stock C.

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Definitions:

Profit-Maximizing

The strategy or process that companies or individuals employ to achieve the highest possible profit from their operations, taking into account factors like production costs, market demand, and pricing strategies.

Pure Monopolist

A market participant that has complete control over the market for a particular good or service, with no close substitutes.

Profit-Maximizing Quantity

The level of output at which a company can achieve the highest profit, where marginal cost is equal to marginal revenue.

Price Discriminate

The practice of selling the same product to different consumers at different prices based on what each is willing to pay.