Question

Stock X has a beta of 0.7 and Stock Y has a beta of 1.3. The standard deviation of each stock's returns is 20%. The stocks' returns are independent of each other, i.e., the correlation coefficient, r, between them is zero. Portfolio P consists of 50% X and 50% Y. Given this information, which of the following statements is CORRECT a. Portfolio P has a standard deviation of 20%.
b. The required return on Portfolio P is equal to the market risk premium (rM ? rRF).
c. Portfolio P has a beta of 0.7.
d. Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, rRF.
e. Portfolio P has the same required return as the market (rM).

Answer 1

Answer:

e. Portfolio P has the same required return as the market (rM).

Explanation:

The answer is e.  Portfolio P has the same required return as the market (rM).

let's find the beta  of the portfolio = 0.5 * 0.7 + 0.5 * 1.3 = 1.0

From the information above , the required return on the portfolio = risk free rate + beta * (Expected market return - risk free rate) = risk free rate + 1 * (Expected market return - risk free rate) = Expected market return.