Question: (Please show me all work and step by step calculations, Thank you!) Stock A has an expected return of 12%, a beta of 1.2, and

(Please show me all work and step by step calculations, Thank you!)

Stock A has an expected return of 12%, a beta of 1.2, and a standard deviation of 20%. Stock B also has a beta of 1.2, but its expected return is 10% and its standard deviation is 15%. Portfolio AB has $900,000 invested in Stock A and $300,000 invested in Stock B. The correlation between the two stocks' returns is zero (that is, rA,B = 0). Which of the following statements is CORRECT?

a. The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is undervalued.

b. Portfolio AB's standard deviation is 17.5%.

c. Portfolio AB's expected return is 11.0%.

d. Portfolio AB's beta is less than 1.2.

e. The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is overvalued.

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

(Please show me all work and step by step calculations, Thank you!) Expected returns Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.1 -12%...

(Please show me all work and step by step calculations, Thank you!) Schnusenberg Corporation just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant rate of...

(Please show me all work and step by step calculations, Thank you!) Daves Inc. recently hired you as a consultant to estimate the company's WACC. You have obtained the following information. (1) The...

(Please show me all work and step by step calculations, Thank you!) Whited Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 5.25% per...

4-10 A portfolio manager summarizes the input from the macro and micro forecasters in the following table: Micro Forecasts Residual Expected Return 8) Beta 24 Standard Deviation (8) Asset Stock A 60...

A portfolio consists of Stock Aand Stock B. Data for the 2 stocks is shown below Stock A: expected return 12% Stock A: standard deviation 40% Stock B: expected return 14% Stock B: standard deviation...

A portfolio consists of Stock A and Stock B. Data for the 2 stocks is shown below Stock A: expected return 12% Stock A: standard deviation 40% Stock B: expected return 14% Stock B: standard deviation...

Part 1: Market Timing This question explores uncertainty in investing. Assume you plan to invest in a broad-basedequity index. You start with a zero balance account. Each year, you plan to contribute...

Part 1: Market Timing This question explores uncertainty in investing. Assume you plan to invest in a broad-based equity index. You start with a zero balance account. Each year, you plan to...

Q2) A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that...

Create your own situation that could be modeled with a binomial probability. make sure that it relates to something in the area of psychology! P(X = x | , ) Where: n = number of observations (the...

Analyze how professors try to promote equity to motivate students.

Liquidity risk _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ . Group of answer choices is not affected by news about the stock refers to the possibility that it might be hard to find shares to trade...

10) For a bond that pays cash interest (i.e., not a zero coupon bond), YTM is (a) always equal to the coupon rate (b) always equal to the current yield (c) is always less than the coupon rate (d) can...

William Jenson bought a pre-owned Audi with a one-year warranty from Best Motors. After driving the car for a week, he noticed a squeaking sound that appeared to be from the motor. He returned to the...

Discuss the importance of using the youviewpoint for effective communication of negative messages. (Objectives 1 and 2)

Why does the message receivers culture affect the choice of direct or indirect plan for communicating negative messages? (Objective 2)