Question 35

Which of the following statements is CORRECT?

A. A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is stable.

B. If the returns on two stocks are perfectly positively correlated (i.e., the correlation coefficient is +1.0) and these stocks have identical standard deviations, an equally weighted portfolio of the two stocks will have a standard deviation that is less than that of the individual stocks.

C. If a stock has a negative beta, its expected return must be negative.

D. According to the CAPM, stocks with higher standard deviations of returns must also have higher expected returns.

E. A portfolio with a large number of randomly selected stocks would have less market risk than a single stock that has a beta of 0.5.