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Stock A has an expected return of 10% and a standard deviation of 20%. Stock B has an expected return of 13% and a standard deviation of 30%. The risk-free rate is 5% and the market risk premium, rM- rRF, is 6%. Assume that the market is in equilibrium. Portfolio AB has 50% invested in Stock A and 50% invested in Stock B. The returns of Stock A and Stock B are independent of one another, i.e., the correlation coefficient between them is zero. Which of the following statements is CORRECT? a. Portfolio AB's required return is 11%. b. Portfolio AB's standard deviation is 25%. c. Stock A's beta is 0.8333. d. Stock B's beta is 1.0000. e. Since the two stocks have zero correlation, Portfolio AB is riskless.

Answer :

Answer:

Expected Portfolio return = 0.5(10)+0.5(13)= 5+6.5=11.5%

Expected Portfolio SD= 0.5(20)+0.5(30)= 25%

Beta of A, 10= 5+B(6)

5=6B

B= 5/6= 0.833

B of B, 13=5+B(6)

8=6B

B=8/6

B=1.33

b. Portfolio AB's standard deviation is 25%

c. Stock A's beta is 0.8333

These two statements are correct

Explanation:

marvineetesh3

The correct options of the above case are that the Portfolio AB's standard deviation is 25% and the Stock A's beta is 0.8333.

Option B and C are correct.

What is portfolio return?

A portfolio return is defined in quotation to how much an investment portfolio increases or decreases in a given period of time.

Portfolio aims to deliver the returns on the declared targets of the investment strategy,

Computation:

According to the given information,

Expected return of stock A = 10%

Expected return of stock B = 13%

Risk-free rate = 5%

Expected Portfolio return of stock A and stock B are:

[tex]\text{Expected Portfolio Return of stock}=\text{Risk-Free Rate}\times \text{Expected Portfolio Return of Stock A}+\text{Risk-Free Rate}\times \text{Expected Portfolio Return of Stock B}[/tex]

[tex]=5\%\times 10\%+ 5\%\times13\%\\\\= 5+6.5\\\\=11.5\%[/tex]

Expected portfolio return of AB is 11.5%.

Expected Portfolio SD of stock A and stock B are:

According to the given information,

SD of stock A =20%

SD of stock A  = 30%

Risk-free rate = 5%

Where, SD stands for Standard Deviation.

[tex]\text{Expected Portfolio SD}=\text{Risk-Free Rate}\times \text{Expected Portfolio SD of Stock A}+\text{Risk-Free Rate}\times \text{Expected Portfolio SD Stock B}[/tex]

[tex]= 5\%\times20\%+5\%\times30\%\\\\= 25\%[/tex]

Beta of A:

[tex]10\%= 5\%+\rm{B(6\%)}\\\\5=6\rm{B}\\\\\rm{B}=\dfrac{5}{6}\\\\\rm{B}=0.833\\[/tex]

Beta of B:

[tex]13\%=5\%+\rm{B(6\%)}\\\\8=6B\\\\B=\dfrac{8}{6}\\\\B=1.33[/tex]

Therefore, Portfolio AB's standard deviation is 25% and the Stock A's beta is 0.8333.

Learn more about the portfolio return, refer to:

https://brainly.com/question/4424358

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