1) Portfolio P has a standard deviation of 20%. (2) The required return on Portfolio P is equal to the market risk premium (rM - TRF). 3) Portfolio P has a beta of 0.7. 4) Portfolio P has a beta of 1.0 and a required return that is equa to the riskless rate, TRF. Portfolio P has the same required return as the market (rm). 5)
1) Portfolio P has a standard deviation of 20%. (2) The required return on Portfolio P is equal to the market risk premium (rM - TRF). 3) Portfolio P has a beta of 0.7. 4) Portfolio P has a beta of 1.0 and a required return that is equa to the riskless rate, TRF. Portfolio P has the same required return as the market (rm). 5)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Concept explainers
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text: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?
1) Portfolio P has a standard deviation of 20%.
2) The required return on Portfolio P is equal to the market risk
premium (RM - TRF).
3) Portfolio P has a beta of 0.7.
4)
Portfolio P has a beta of 1.0 and a required return that is equal
to the riskless rate, TRF.
Portfolio P has the same required return as the market (rm).
5)
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 3 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education