Question

In: Finance

Stocks A and B each have an expected return of 15%, a standard deviation of 20%,...

Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and a beta of 1.2. The returns on the two stocks have a correlation coefficient of -1.0. You have a portfolio that consists of 50% A and 50% B. Which of the following statements is CORRECT?

The portfolio's standard deviation is zero (i.e., a riskless portfolio).

The portfolio's standard deviation is greater than 20%.

The portfolio's expected return is less than 15%.

The portfolio's beta is less than 1.2.

The portfolio's beta is greater than 1.2.

Solutions

Expert Solution

Answer is The portfolio's standard deviation is zero (i.e., a riskless portfolio)

Explanation:

The portfolio's standard deviation is zero (i.e., a riskless portfolio) is correct. We calculate the standard deviation of the portfolio.

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The portfolio's standard deviation is greater than 1.2 is incorrect. The standard deviation of the portfolio is zero.

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The portfolio's expected return is less than 15% is incorrect. The calculation is as follows

or 15%

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The portfolio's beta is less than 1.2 is incorrect. The calculation is as follows

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The portfolio's beta is greater than 1.2 is incorrect. The calculation is as follows

jeff jeffy answered 2 years ago
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