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?
A) The required return on Portfolio P is equal to the market risk premium (rM - rRF).
B) Portfolio P has a beta of 0.7.
C) Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, rRF.
D) Portfolio P has the same required return as the market (rM).

Question

Quizplus · Accepted Answer

Portfolio P has a beta of 1.0, which is the average of the betas of the two stocks. The required return on Portfolio P is therefore equal to the riskless rate plus the market risk premium multiplied by the portfolio's beta, which is (rRF + (rM - rRF) * 1.0) = rM.

Stock X Has a Beta of 0