3. Stock X has a beta of 0.7 and Stock Y has a beta of 1.3. The standard deviation of each stock's returns is 20%. The stocks' returns are independent of each other, i.e., the correlation coefficient, r, between them is zero. Portfolio P consists of 50% X and 50% Y. Given this information, which of the following statements is CORRECT? Explain.
a. Portfolio P has a standard deviation of 20%.
b. The required return on Portfolio P is equal to the market risk premium (rM − rRF).
c. Portfolio P has a beta of 0.7.
d. Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, rRF.
e. Portfolio P has the same required return as the market (rM).
1
Expert's answer
2012-01-27T08:30:28-0500
b. The required return on Portfolio P is equal to the market risk premium (rM − rRF). Because the average Beta will be (1.3 + 0.7)/2 = 1, Return = Beta*(rM − rRF)
Comments
Leave a comment