You are considering whether to invest in two stocks. Stock A and Stock B. Stock

Question

You are considering whether to invest in two stocks. Stock A and Stock B. Stock A has a beta of 1.15 and the standard deviation of its return has been estimated to be .28. For stock B, the beta is .84 and the standard deviation is .48 a) Which stock is riskier? b) If the risk-free rate is 4% and the market risk premium is 8%, what is the expected return for a portfolio that is composed of 60% A and 40% B? C) If the correlation between the returns of A and B is.50, what is the the standard deviation for the portfolio that includeds 60% A and 40% B?

Explanation / Answer

stock B as it has a higher beta value so chances of return is also high stock B =.84*.48 =40.32% whereas A return=1.15*.28 =31.36 %

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