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Suppose that the standard deviation of returns for a single stock A is sigma A = 4 0 % , and the standard deviation
Suppose that the standard deviation of returns for a single stock A is sigma A
and the standard deviation of the market return is sigma M
If the correlation between stock A and the market is rho AM
then the stocks beta is
Is it reasonable to expect that the beta value estimated via the regression of stock As returns against the market returns will equal the true value of stock As beta?
No
Yes
Next, consider a twoasset portfolio consisting of stock A with wA
and an expected return rA
and a standard deviation of sigma A
and stock B with rB
and sigma B
Assuming that the correlation between stocks A and B is zero, the expected return to the portfolio is and the portfolios standard deviation is
Suppose that the correlation between stocks A and B is rho AB
instead of zero. Which of the following statements correctly reflects the new data?
The risk associated with the portfolio is higher.
The expected return to the portfolio is higher.
The risk associated with the portfolio is the same as when the correlation is zero.
The risk associated with the portfolio is lower.
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