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

Question

Quizplus · Accepted Answer

Portfolio P's beta is equal to the average of the betas of the three stocks, which is (0.8 + 1.0 + 1.2)/3 = 1.0. Thus, Portfolio P's expected return is equal to the expected return on Stock B, which is the expected return on the market since it has a beta of 1.0. Therefore, option C is correct. The fact that the stocks have the same standard deviation and that their returns are independent of each other is irrelevant in this case.

Stock a Has a Beta of 0