Question

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 portfolio?
a. Your portfolio has a standard deviation greater than 30% and a beta equal to 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 of 30%, and its expected return is 15%.
e. Your portfolio has a standard deviation less than 30%, and its beta is greater than 1.6.

Answer 1

Answer:

B

Explanation:

Beta of a portfolio is given by adding the some of the beta of each stock multiplied by the weights

Overall investment equals $50000+$50000=$100000

which gives Wx=50000/100000=0.5

                    Wy=50000/100000=0.5

Bp=Wx*Bx)+(Wy*By)

     =(0.5*1.6)+(0.5*1.6)

     =1.6

The expected return calculated by sum of weight multiplied by expected return

Er=(0.5*15%)+(0.5*15%)

    =15%

The portfolio has a beta equal to 1.6 and expected return equal to 15%