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

Question

Quizplus · Accepted Answer

Portfolio P has a beta of 1.0 because the beta of the portfolio is the weighted average of the betas of the stocks in the portfolio. With equal investments in Stock A (beta = 1.2) and Stock B (beta = 0.8), the portfolio's beta is (1.2 + 0.8) / 2 = 1.0.

Stock a Has a Beta of 1