Stock X has a beta of 0.7 and Stock Y has a beta of 1.3.The standard deviation of each stock's returns is 20%.The stocks' returns are independent of each other,i.e.,the correlation coefficient,r,between them is zero.Portfolio P consists of 50% X and 50% Y.Given this information,which of the following statements is correct? A)The required return on Portfolio P is equal to the market risk premium (r_M - r_RF). B)Portfolio P has a beta of 0.7. C)Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, r_RF. D)Portfolio P has the same required return as the market (r_M).

Question

Quizplus · Accepted Answer

The beta of a portfolio is the weighted average of the betas of the individual stocks in the portfolio, with the weights being the proportions of each stock in the portfolio. In this case, the beta of Portfolio P is (0.5 * 0.7) + (0.5 * 1.3) = 1.0. The required return on a portfolio is equal to the risk-free rate plus the product of the portfolio's beta and the market risk premium. In this case, the required return on Portfolio P is equal to the risk-free rate plus (1.0 * the market risk premium). Therefore, Portfolio P has the same required return as the market.

Stock X Has a Beta of 0