Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of

Question

Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2. Portfolio P has 1/3 of its value invested in each of the these stocks. Each stock has a standard deviation of 25%, and their returns are independent of one another, i.e., the correlation coefficients between each pair of stock is zero. Assuming the market is in equilibrium, which of the following statements is correct?

A. Portfolio P's expected return is greater than the expected return on stock C.

B. Portfolio P's expected return is greater than the expected return on stock B.

C. Portfolio P's expected return is equal to the expected return on stock A.

D. Portfolio P's expected return is less than the expected return on stock B.

E. Portfolio P's expected return is equal to the expected return on stock B.

Explanation / Answer

Portfolio P's expected return is greater than the expected return on stock B.

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