1.) You consider buying both Stock A and Stock B to make a portfolio to reduce some unsystematic risk. Both stocks will be weighted equally in the portfolio. Stock A has an expected return of 11% and a standard deviation of 18%. Stock B has an expected return of 8% and a standard deviation of 20%. If the correlation of the stocks is 1, can you reduce the unsystematic risk?
A)Yes: the standard deviation of the two-stock portfolio will be lower than the average standard deviation of two.
B)Yes: the standard deviation of the two-stock portfolio will be higher than the average standard deviation of two.
C)No: the standard deviation of the two-stock portfolio will be the same as the average standard deviation of two.
D)No: the standard deviation of the two-stock portfolio will be higher than the average standard deviation of two.
E)Insufficient information to answer.
2.) You are analyzing a common stock with a beta of 1.5. The risk-free rate of interest is 5 percent and the expected return on the market is 15 percent. If the stock's return based on its market price is 21.5%,
A) the stock is overvalued since the expected return is above the SML.
B) the stock is undervalued since the expected return is above the SML.
C) the stock is correctly valued since the expected return is above the SML.
D) the stock is overvalued since the expected return is below the SML.
E) the stock is undervalued since the expected return is below the SML.