Stock A has an expected return of 12%,a beta of 1.2,and a standard deviation of 20%.Stock B also has a beta of 1.2,but its expected return is 10% and its standard deviation is 15%.Portfolio AB has $900,000 invested in Stock A and $300,000 invested in Stock B.The correlation between the two stocks' returns is zero (that is,r_A,B = 0).Which of the following statements is CORRECT? A)Portfolio AB's standard deviation is 17.5%. B)The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is overvalued. C)The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is undervalued. D)Portfolio AB's expected return is 11.0%. E)Portfolio AB's beta is less than 1.2.

Question

Quizplus · Accepted Answer

Since both stocks have the same beta, they should have the same expected return if they are in equilibrium according to the CAPM. Stock B has a lower expected return than Stock A, indicating that Stock B is overvalued.

Stock a Has an Expected Return of 12%,a Beta of 1.2,and