Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock B.Stock A has a beta of 1.2 and a standard deviation of 20%.Stock B has a beta of 0.8 and a standard deviation of 25%.Which of the following statements is CORRECT? (Assume that the stocks are in equilibrium.)
A) Stock B has a higher required rate of return than Stock A.
B) Portfolio P has a standard deviation of 22.5%.
C) More information is needed to determine the portfolio's beta.
D) Portfolio P has a beta of 1.0.
E) Stock A's returns are less highly correlated with the returns on most other stocks than are B's returns.

Question

Quizplus · Accepted Answer

Portfolio P's beta is the weighted average of the betas of Stock A and Stock B. Since both stocks have equal weight in the portfolio and their betas are 1.2 and 0.8 respectively, the portfolio's beta is (1.2+0.8)/2 = 1.0.

Portfolio P Has $200,000 Consisting of $100,000 Invested in Stock