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 which has a beta equal to 0.5.
E) None of the above statements is correct.

Question

Quizplus · Accepted Answer

All of the statements are incorrect:
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 greater than that of the individual stocks.
B) A negative beta only means that the stock moves in the opposite direction of the market. It does not necessarily mean the expected return is negative.
C) According to the CAPM, stocks with higher standard deviations of returns will have higher risk premiums, not necessarily higher expected returns.
D) A portfolio with randomly selected stocks does not necessarily have less market risk than a single stock with a beta of 0.5. The portfolio's risk depends on the correlation of the stocks within the portfolio.

Which of the Following Statements Is Correct