Stock A has a beta of 1.2 and a standard deviation of 25%.Stock B has a beta of 1.4 and a standard deviation of 20%.Portfolio AB was created by investing in a combination of Stocks A and B.Portfolio AB has a beta of 1.25 and a standard deviation of 18%.Which of the following statements is correct?
A)Stock A has more market risk than Portfolio AB.
B)Stock A has more market risk than Stock B but less stand-alone risk.
C)Portfolio AB has more money invested in Stock A than in stock B.
D)Portfolio AB has the same amount of money invested in each of the two stocks.

Question

Quizplus · Accepted Answer

Portfolio AB has a beta of 1.25, which is higher than Stock A's beta of 1.2. This indicates that Portfolio AB has more market risk than Stock A. However, Portfolio AB has a lower standard deviation of 18% compared to Stock A's standard deviation of 25%. This suggests that Portfolio AB has less stand-alone risk than Stock A. Therefore, the correct answer is that Stock A has more market risk than Portfolio AB but less stand-alone risk.

Stock a Has a Beta of 1