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, but its expected return is 10% and its standard deviation is 15% Portfolio AB has $300,000 invested in Stock A and $100,000 invested in Stock B The correlation between the two stocks' returns is zero (that is, rA,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.
E) Portfolio AB's standard deviation is 17.5%.

Question

Quizplus · Accepted Answer

Stock A has a higher expected return than Stock B despite having the same beta, indicating that Stock B is overvalued according to the CAPM, assuming Stock A is correctly valued.

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