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Answer on Economics of Enterprise Question for Lamarcus Streeter

Question #6128
3. Stock X has a beta of 0.7 and Stock Y has a beta of 1.3. The standard deviation of each stock's returns is 20%. The stocks' returns are independent of each other, i.e., the correlation coefficient, r, between them is zero. Portfolio P consists of 50% X and 50% Y. Given this information, which of the following statements is CORRECT? Explain.

a. Portfolio P has a standard deviation of 20%.
b. The required return on Portfolio P is equal to the market risk premium (rM − rRF).
c. Portfolio P has a beta of 0.7.
d. Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, rRF.
e. Portfolio P has the same required return as the market (rM).
Expert's answer
b. The required return on Portfolio P is equal to the market risk premium (rM −
rRF).
Because the average Beta will be (1.3 + 0.7)/2 = 1, Return = Beta*(rM − rRF)

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