Stock A has a beta of 1.2 and a standard deviation of 25%.Stock B has a beta of 1.4 and a standard deviation of 20%.Portfolio AB was created by investing in a combination of Stocks A and B.Portfolio AB has a beta of 1.25 and a standard deviation of 18%.Which of the following statements is CORRECT?
A) Stock A has more market risk than Portfolio AB.
B) Stock A has more market risk than Stock B but less stand-alone risk.
C) Portfolio AB has more money invested in Stock A than in Stock B.
D) Portfolio AB has the same amount of money invested in each of the two stocks.
E) Portfolio AB has more money invested in Stock B than in Stock A.

Question

Quizplus · Accepted Answer

c is correct. 11ea856c_8bc6_9177_9aec_476ab2e2cebf_TB1222_11 = %A(1.2)+ %B(1.4)= 1.25.If 50% is in each stock,then we would have 11ea856c_8bc6_b888_9aec_a94c0fafbd03_TB1222_11 = 0.5(1.2)+ 0.5(1.4)= 1.3.But 11ea856c_8bc6_b889_9aec_771181238e69_TB1222_11 < 1.3,so more money must be invested in the low-beta stock,A.

Stock a Has a Beta of 1