Question 17.

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. Portfolio AB's expected return is 11.0%.

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

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

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

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

Please show work / formulas in excel!