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

Question

Quizplus · Accepted Answer

Since the stocks have independent returns with a correlation of zero, the portfolio's risk (standard deviation) might be reduced through diversification, but the beta and expected return of the portfolio are weighted averages of the individual stocks. Given both stocks have the same beta of 1.6 and expected return of 15%, the portfolio inherits these values directly without adjustment.

The Two Stocks in Your Portfolio, X and Y, Have