Question

Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and a beta of 1.2. The returns on the two stocks have a correlation coefficient of 0.6. Your portfolio consists of 50% A and 50% B. Which of the following statements is CORRECT?
A. The portfolio's expected return is 15%.
B. The portfolio's standard deviation is greater than 20%.
C. The portfolio's beta is greater than 1.2.
D. The portfolio's standard deviation is 20%.
E. The portfolio's beta is less than 1.2.

Answer 1

Answer:

The correct answer is option (A) The portfolio's expected return is 15%

Explanation:

Solution

Given that:

Both Stock A and B have a return expected to be =15%

Standard deviation of =20%

Beta = 1.2

Correlation coefficient = 0.6

Now,

The expected return of the portfolio is computed as follows:

Expected return (ERp) = (ERₐ * Wₐ) +(ERb * Wb)

Expected return (ERp)  = (15% *50%) +(15%* 50 %)

Expected return (ERp) = (0.075) + (0.075)

Expected return (ERp) =0.15 or 15%

Expected return (ERp)  = 15%