What happens when returns on stock a increase?
When returns on Stock A increase, returns on Stock B also increase. In general, this would mean that Stocks A and B are positively correlated. The risk in a portfolio will increase if more stocks that are negatively correlated with other stocks are added to the portfolio.
What is the expected return on investment in stocks a and B?
Stocks A and B both have an expected return of 10% and a standard deviation of returns of 25%. Stock A has a beta of 0.8 and Stock B has a beta of 1.2. The correlation coefficient, r, between the two stocks is +0.6. Portfolio P has 50% invested in Stock A and 50% invested in B.
What is the correlation between stocks a and B?
Stocks A and B have returns that are independent of one another, i.e., their correlation coefficient, r, equals zero. Stocks A and C have returns that are negatively correlated with one another, i.e., r is less than 0.
What happens to the required return for stocks with high betas?
The required return will fall for all stocks, but it will fall more for stocks with higher betas. c. The required return will fall for all stocks, but it will fall less for stocks with higher betas. d. The required return on all stocks will remain unchanged. e.
What is the difference between portfolio A and portfolio B?
Portfolio A has only one stock, while Portfolio B consists of all stocks that trade in the market, each held in proportion to its market value. Because of its diversification, Portfolio B will by definition be riskless. FALSE. Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2.
What is the standard deviation of a stock?
Each of the stocks has a standard deviation of 25%. The returns on the three stocks are independent of one another (i.e., the correlation coefficients all equal zero). Assume that there is an increase in the market risk premium, but the risk-free rate remains unchanged.
What does risk averse investors require?
Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse. Assume that investors have recently become more risk averse, so the market risk premium has increased. Also, assume that the risk-free rate and expected inflation have not changed.
