Portfolio AB was created by investing in a combination of Stocks A and B. 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 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 stock b but less stand-alone risk.
B) portfolio ab has more money invested in stock a than in stock b.
C) portfolio ab has the same amount of money invested in each of the two stocks.
D) portfolio ab has more money invested in stock b than in stock a.
E) stock a has more market risk than portfolio ab.

Question

Quizplus · Accepted Answer

b is correct. Beta P = %A(1.2) + %B(1.4) = 1.25. If 50% is in each stock, then we would have Beta P = 0.5(1.2) + 0.5(1.4) = 1.3. But beta P < 1.3, so more money must be invested in the low beta stock, A.

Portfolio AB Was Created by Investing in a Combination of Stocks