Stock A has an expected return of 12%, a beta of 1.2, and a standard deviation o
ID: 2705174 • Letter: S
Question
Stock A has an expected return of 12%, a beta of 1.2, and a standard deviation of 20%. Stock B has an expected return of 10%, a beta of 1.2, and a standard deviation of 15%. Portfolio AB has $700,000 invested in Stock A and $300,000 invested in stock B. The correlation between the two stocks' return is zero. Which of thefollowing statements is correct?
Portfolio AB's expected return is 11%.
Portfolio AB's standard deviation is 17.5%.
Portfolio AB's beta is less than 1.2.
The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is overvalued.
The stocks are not in equilibrium based on the CAPM; if A is valued correctly, than B is undervalued.
Explanation / Answer
The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is overvalued.
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