Question

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%. Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock B. Which of the following statements is CORRECT? (Assume that the stocks are in equilibrium.) a. Portfolio P has a standard deviation of 22.5%. b. Portfolio P has a beta of 1.0. c. Stock B has a higher required rate of return than Stock A. d. More information is needed to determine the portfolio's beta. e. Stock A's returns are less highly correlated with the returns on most other stocks than are B's returns.

Answer 1

Answer:

The correct answer is option b.

Explanation:

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%.

Portfolio investment is $200,000.

Investment in stock A is $100,000.

Investment in stock B is $100,000.

The portfolio beta is

=$\frac{Investment in stock A}{portfolio investment} *beta of stock A+\frac{Investment in stock B}{portfolio investment} *beta of stock B$

=$\frac{100,000}{200,000}*1.2+\frac{100,000}{200,000}*0.8$

=0.6+0.4

=1

So, the portfolio beta for P is 1.