Which of the following statements is most correct?
A) If the returns from two stocks are perfectly positively correlated and the two stocks have equal variance, an equally weighted portfolio of the two stocks will have a variance which is less than that of the individual stocks.
B) If a stock has a negative beta, its expected return must be negative.
C) According to the CAPM, stocks with higher standard deviations of returns will have higher expected returns.
D) A portfolio with a large number of randomly selected stocks will have less market risk than a single stock which has a beta equal to 0.5.
E) None of the statements above is correct.

Question

Quizplus · Accepted Answer

None of the statements are correct. 
A) The variance of an equally weighted portfolio of two perfectly positively correlated stocks with equal variance will be greater than the variance of the individual stocks. 
B) A negative beta indicates that the stock moves in the opposite direction of the market, but it does not necessarily mean that the expected return is negative. 
C) According to the CAPM, stocks with higher standard deviations of returns will have higher betas and therefore higher expected returns, but not necessarily higher standard deviations of returns. 
D) The market risk of a large portfolio of randomly selected stocks will approach the market risk of the overall market, which is greater than the market risk of a single stock with a low beta.

Which of the Following Statements Is Most Correct