Stocks A and B each have an expected return of 15%,a standard deviation of 20%,and a beta of 1.2.The returns on the two stocks have a correlation coefficient of +0.6.You have a portfolio that consists of 50% A and 50% B.Which of the following statements is correct?
A)The portfolio's beta is less than 1.2.
B)The portfolio's expected return is 15%.
C)The portfolio's standard deviation is greater than 20%.
D)The portfolio's beta is greater than 1.2.

Question

Quizplus · Accepted Answer

The expected return of the portfolio can be calculated as:
Expected return = (0.5 x 15%) + (0.5 x 15%) = 15%
Therefore, statement B is correct. 
The portfolio's beta can be calculated as:
Portfolio beta = (0.5 x 1.2) + (0.5 x 1.2) = 1.2
Therefore, statement A and D are incorrect. 
The portfolio's standard deviation can be calculated as:
Portfolio standard deviation = sqrt[(0.5^2 x 20%^2) + (0.5^2 x 20%^2) + 2 x 0.5 x 0.5 x 20% x 20% x 0.6] = 16.96%
Therefore, statement C is incorrect.

Stocks a and B Each Have an Expected Return of 15%,a