Which of the following statements is 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 whish 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 with has a beta equal to 0.5.
E) None of the above statements are correct.

Question

Quizplus · Accepted Answer

A) This statement is incorrect. The variance of an equally weighted portfolio of two perfectly positively correlated stocks having equal variance will be greater than the variance of individual stocks.
B) This statement is incorrect. The expected return of a stock with a negative beta could still be positive.
C) This statement is incorrect. According to the CAPM, stocks with higher standard deviations of returns will have higher risk, and therefore a higher required/expected return.
D) This statement is incorrect. The market risk of a portfolio depends on the systematic risk of the individual assets in the portfolio, and not the number of assets in the portfolio alone. A portfolio with a large number of randomly selected stocks may still have high systematic risk if these stocks are highly correlated with the market.

Which of the Following Statements Is Correct