Question

2) Assume the following information for a $20,000 investment portfolio in stocks of MSFT and IBM. Security Return Standard Deviation Beta $ invested MSFT 10% 8% 0.7 $15,000 IBM 14% 14% 1.7 $ 5,000 Treasury Bills are returning 6% annually. Regarding the two-stock portfolio above, which of the following statements is true? a. As the prices in the overall market change, the price of MSFT stock should swing farther than the price of IBM stock. b. Because IBM provides the best return-per-unit-of-risk (higher reward-to-risk ratio), you should increase the proportion of the portfolio invested in IBM. c. The systematic risk for the whole portfolio (i.e., portfolio beta) is equal to 9.5 (nine and a-half), which is a typical beta for most stock portfolios. d. All of the above answers are correct. e. None of the above answers is correct.

Answer 1

Option E none of the answers are correct is the correct answer

Option A is wrong because Beta of the MSFT is less than IBM so the change in MSFT will be lesser than change in IBM

Option B is wrong because MSFT(10%/8% = 1.25) has highest reward to risk ratio than IBM (14%/14% = 1)

Option C is wrong because Portfolio beta = 0.95

Beta is Portfolio Beta = Weight of MSFT * Beta of MSFT + Weight of IBM * Beta of IBM

Portfolio Beta = 15000/20000 * 0.70 + 5000/20000 * 1.70

Portfolio Beta = 0.95

Option D is incorrect

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