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, r_A,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 B has a lower expected return than Stock A despite having the same beta, indicating it is overvalued according to the CAPM if Stock A is correctly valued.

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