a) If the expected rate of return for a particular investment, as seen by the ma
ID: 2816069 • Letter: A
Question
a) If the expected rate of return for a particular investment, as seen by the marginal investor, exceeds its required rate of return, we should soon observe a(an) __________ in demand for the investment, and the price will likely __________ until a price is established that equates the expected return with the required return. ***Fill in the blanks using either "increase" or "decrease".
b) Both Stock A and Stock B have the same expected return of 15 percent, the same standard deviation of 20 percent, and the same beta of 1.2. The returns of the two stocks are not perfectly correlated; the correlation coefficient is 0.6. You have put together a portfolio which is 50 percent Stock A and 50 percent Stock B. Which of the following statements is most correct?
The portfolio's expected return is 15 percent.
The portfolio's beta is less than 1.2.
The portfolio's standard deviation is 20 percent.
Statements a and b are correct.
All of the statements above are correct.
The portfolio's expected return is 15 percent.
The portfolio's beta is less than 1.2.
The portfolio's standard deviation is 20 percent.
Statements a and b are correct.
All of the statements above are correct.
Explanation / Answer
Expected Return = Weight of Stock A * Return of Stock A + Weight of TSock B * Return of Stock B
= 0.5 * 15% + 0.5 * 15% = 15%
If the correlation is 1 then standard deviation would be 20% but since the correlation is 0.6 the portfolio has a standard deviation is less than 20%
The portfolio beta is less than 1.2
Option d. Statement and b is correct . The portfolio's expected return is 15 percent.
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