Which of the following statements is most correct?
A) If beta doubles,the required return doubles.
B) If a stock has a negative beta,its required return is negative.
C) Higher beta stocks have more company-specific risk,but do not necessarily have more market risk.
D) If a portfolio's beta increases from 1.2 to 1.5,its required rate of return will increase by an amount equal to its market risk premium.
E) If two stocks have the same standard deviation and the correlation coefficient between the returns of two stocks equals zero,an equally weighted portfolio of the two stocks will have a standard deviation lower than that of the individual stocks.

Question

Quizplus · Accepted Answer

E is correct because when two stocks have the same standard deviation and their returns are uncorrelated (correlation coefficient equals zero), diversification benefits come into play. By combining them into an equally weighted portfolio, the overall portfolio risk (standard deviation) is reduced due to the lack of correlation between the stocks' returns. This is a fundamental principle of portfolio theory, where diversification can lower portfolio risk when the returns of the included assets are not perfectly correlated.

Which of the Following Statements Is Most Correct