Portfolio P has $200, 000 consisting of $100, 000 invested in Stock A and $100, 000 in Stock B.Stock A has a beta of 1.2 and a standard deviation of 20%.Stock B has a beta of 0.8 and a standard deviation of 25%.Which of the following statements is CORRECT? (Assume that the stocks are in equilibrium.)

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Quizplus · Accepted Answer

CThe portfolio's beta is the weighted average of the betas of the stocks in the portfolio. Since both stocks A and B have equal weights in the portfolio and their betas are 1.2 and 0.8 respectively, the portfolio's beta is (1.2+0.8)/2 = 1.0. More information is indeed needed to determine the portfolio's standard deviation because it depends not only on the standard deviations of the individual stocks but also on their correlation. The correlation between the stocks affects the portfolio's overall risk, which cannot be determined with the given information.

Portfolio P Has $200, 000 Consisting of $100, 000 Invested