You have a portfolio P that consists of 50% Stock X and 50% Stock Y.Stock X has a beta of 0.7 and Stock Y has a beta of 1.3.The standard deviation of each stock's returns is 20%.The stocks' returns are independent of each other, i.e., the correlation coefficient, r, between them is zero.Given this information, which of the following statements is CORRECT? A) The required return on Portfolio P is equal to the market risk premium (r_M − r_RF). B) Portfolio P has a beta of 0.7. C) Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, r_RF. D) Portfolio P has the same required return as the market (r_M). E) Portfolio P has a standard deviation of 20%.

Question

Quizplus · Accepted Answer

The beta of Portfolio P is the weighted average of the betas of Stock X and Stock Y, which is (0.7*0.5 + 1.3*0.5) = 1.0. A portfolio with a beta of 1.0 has the same systematic risk as the market, thus its required return is equal to the market's required return.

You Have a Portfolio P That Consists of 50% Stock