The two stocks in your portfolio, X and Y, have independent returns, so the correlation between them, rXY is zero. Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y. Both stocks have an expected return of 15%, betas of 1.6, and standard deviations of 30%. Which of the following statements best describes the characteristics of your 2-stock portfolioσ
A) your portfolio has a standard deviation less than 30%, and its beta is greater than 1.6.
B) your portfolio has a beta equal to 1.6, and its expected return is 15%.
C) your portfolio has a beta greater than 1.6, and its expected return is greater than 15%.
D) your portfolio has a standard deviation greater than 30% and a beta equal to 1.6.
E) your portfolio has a standard deviation of 30%, and its expected return is 15%.

Question

Quizplus · Accepted Answer

The portfolio beta is the weighted average of the individual betas, which is 1.6. The expected return is also the weighted average, which is 15%. The standard deviation is less than 30% due to diversification.

The Two Stocks in Your Portfolio, X and Y, Have