Correlation between the two stocks returns is zero

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Reference no: EM131813060

1. Stock A has an expected return of 12%, a beta of 1.2, and a standard deviation of 20%. Stock B also has a beta of 1.2, but its expected return is 10% and its standard deviation is 15%. Portfolio AB has $900,000 invested in Stock A and $300,000 invested in Stock B. The correlation between the two stocks' returns is zero (that is, rA,B = 0). Which of the following statements is CORRECT?

a. The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is undervalued.

b. Portfolio AB's standard deviation is 17.5%.

c. Portfolio AB's expected return is 11.0%.

d. Portfolio AB's beta is less than 1.2.

e. The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is overvalued.

2. Whited Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 5.25% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?

a. $52.81

b. $39.15

c. $45.53

d. $40.06

e. $47.80

Reference no: EM131813060

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