Asked by
Sarah Carver
on Nov 28, 2024
Verified
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) The required return on Portfolio P is equal to the market risk premium (rM - rRF) .
B) Portfolio P has a beta of 0.7.
C) Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, rRF.
D) Portfolio P has the same required return as the market (rM) .
Market Risk Premium
The extra return over the risk-free rate that investors require to compensate them for the risk of holding a market portfolio.
Required Return
The minimum rate of return on an investment that investors expect or require to compensate for risks taken.
Beta
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
- Identify and explain the role of beta in assessing the risk of individual stocks and portfolios.
- Understand the concept of the Security Market Line (SML) and its implications for required returns based on beta.
Verified Answer
MK
Learning Objectives
- Identify and explain the role of beta in assessing the risk of individual stocks and portfolios.
- Understand the concept of the Security Market Line (SML) and its implications for required returns based on beta.