Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2.Portfolio P has 1/3 of its value invested in each stock.Each stock has a standard deviation of 25%, and their returns are independent of one another, i.e., the correlation coefficients between each pair of stocks is zero.Assuming the market is in equilibrium, which of the following statements is CORRECT?

Question

Quizplus · Accepted Answer

Since each stock has an equal weight in portfolio P, portfolio P's beta is the average of the betas of the three stocks, which is (0.8+1.0+1.2)/3=1.0. Thus, portfolio P has the same systematic risk as Stock B, which has a beta of 1.0. According to the CAPM, the expected return on an asset is determined by its beta and the expected return on the market portfolio. Since portfolio P and Stock B have the same beta, they should have the same expected return. Therefore, the correct statement is that Portfolio P's expected return is equal to the expected return on Stock B.

Stock a Has a Beta of 0