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8 November, 09:54

The two stocks in your portfolio, X and Y, have independent returns, so the correlation between them, rXY is zero. Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y. Both stocks have an expected return of 15%, betas of 1.6, and standard deviations of 30%. Which of the following statements best describes the characteristics of your 2-stock portfolio?

a. Your portfolio has a standard deviation greater than 30% and a beta equal to 1.6.

b. Your portfolio has a beta equal to 1.6, and its expected return is 15%.

c. Your portfolio has a beta greater than 1.6, and its expected return is greater than 15%.

d. Your portfolio has a standard deviation of 30%, and its expected return is 15%.

e. Your portfolio has a standard deviation less than 30%, and its beta is greater than 1.6.

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  1. 8 November, 10:06
    0
    B

    Explanation:

    Beta of a portfolio is given by adding the some of the beta of each stock multiplied by the weights

    Overall investment equals $50000+$50000=$100000

    which gives Wx=50000/100000=0.5

    Wy=50000/100000=0.5

    Bp=Wx*Bx) + (Wy*By)

    = (0.5*1.6) + (0.5*1.6)

    =1.6

    The expected return calculated by sum of weight multiplied by expected return

    Er = (0.5*15%) + (0.5*15%)

    =15%

    The portfolio has a beta equal to 1.6 and expected return equal to 15%
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