Which of the following statements is correct?
A)If the returns from two stocks are perfectly positively correlated and the two stocks have equal variance, an equally weighted portfolio of the two stocks will have a variance which is less than that of the individual stocks.
B)If a stock has a negative beta, its expected return must be negative.
C)According to the CAPM, stocks with higher standard deviations of returns will have higher expected returns.
D)A portfolio with a large number of randomly selected stocks will have less market risk than a single stock with has a beta equal to 0.5.
E)None of the above statements are correct.

Question

Quizplus · Accepted Answer

A) This statement is incorrect as the variance of an equally weighted portfolio of perfectly positively correlated stocks is higher than that of the individual stocks.
B) This statement is incorrect as a negative beta means the stock moves in the opposite direction of the market, but it can still have a positive expected return.
C) This statement is incorrect as the CAPM suggests that higher standard deviations will lead to higher risk, and therefore a higher expected return, but not necessarily the highest expected returns.
D) This statement is incorrect as a portfolio with randomly selected stocks still carries market risk, and the market risk of a portfolio depends on the beta of the portfolio as a whole, not just the number of stocks in it.
Therefore, none of the given statements are correct.

Which of the Following Statements Is Correct