Stock a Has an Expected Return of 12%,a Beta of 1.2,and

question 40

Multiple Choice

Stock A has an expected return of 12%,a beta of 1.2,and a standard deviation of 20%.Stock B also has a beta of 1.2,an expected return of 10%,and a standard deviation of 15%.Portfolio AB has $900,000 invested in Stock A and $300,000 invested in Stock B.The correlation between the two stocks' returns is zero (that is,r_A,B = 0) .Which of the following statements is correct?

• A)The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is overvalued.
• B)The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is undervalued.
• C)Portfolio AB's expected return is 11.0%.
• D)Portfolio AB's beta is less than 1.2.

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Definitions:

Beginning Balance

The amount of funds or value of an account at the start of a new financial period.

Cash Account

An account in a brokerage or financial statement that shows the amount of cash available for transactions.

Cash Payments

Monetary transactions involving the outflow of cash to settle debts, purchase goods, or acquire services.

Bank Statement Balance

The ending balance on a bank statement for a particular period, reflecting all transactions including deposits, withdrawals, fees, and interest earned.