15. Which of the following statements is CORRECT? A If the returns on two stocks

Question

15. Which of the following statements is CORRECT? A If the returns on two stocks are perfectly positively correlated (i.e., the correlation coefficient is +1.0) and these stocks have identical standard deviations, an equally weighted portfolio of the two stocks will have a standard deviation that is less than that of the individual stocks. B A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is stable. C If a stock has a negative beta, its expected return must be negative. D A portfolio with a large number of randomly selected stocks would have less market risk than a single stock that has a beta of 0.5. E According to the CAPM, stocks with higher standard deviations of returns must also have higher expected returns.

Explanation / Answer

B A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is stable.

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