Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y.Both stocks have an expected return of 15%,betas of 1.6,and standard deviations of 30%.The returns of the two stocks are independent,so the correlation coefficient between them,rXY,is zero.Which of the following statements best describes the characteristics of your 2-stock portfolio?
A) Your portfolio has a standard deviation of 30%,and its expected return is 15%.
B) Your portfolio has a standard deviation less than 30%,and its beta is greater than 1.6.
C) Your portfolio has a beta equal to 1.6,and its expected return is 15%.
D) Your portfolio has a beta greater than 1.6,and its expected return is greater than 15%.
E) Your portfolio has a standard deviation greater than 30% and a beta equal to 1.6.

Question

Quizplus · Accepted Answer

Since the portfolio is equally weighted between two stocks with identical betas (1.6) and expected returns (15%), the portfolio's overall beta and expected return mirror those of the individual stocks. The correlation coefficient's value (zero) affects the portfolio's standard deviation but not its beta or expected return.

Your Portfolio Consists of $50,000 Invested in Stock X and $50,000