St Stock A has Stock A has an expected return of 10% and a standard deviation of
ID: 2705008 • Letter: S
Question
StStock A has 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- rRF, is 6%. Assume that the market is in equilibrium. Portfolio AB has 50% invested in Stock A and 50% invested in Stock B. 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.
Stock A's beta is 0.8333.
b.
Since the two stocks have zero correlation, Portfolio AB is riskless.
c.
Stock B's beta is 1.0000.
d.
Portfolio AB's required return is 11%.
e.
Portfolio AB's standard deviation is 25%.
a.
Stock A's beta is 0.8333.
b.
Since the two stocks have zero correlation, Portfolio AB is riskless.
c.
Stock B's beta is 1.0000.
d.
Portfolio AB's required return is 11%.
e.
Portfolio AB's standard deviation is 25%.
Explanation / Answer
expected return of AB portfolio = 50%*10% + 50%*13% =11.5%
d is not correct
ra = risk free + beta*risk premium
10% = 5% + beta*6%
beta of A = 0.833
a.
Stock A's beta is 0.8333.
a.
Stock A's beta is 0.8333.
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