A mutual fund focused on the financial services sector has 3 different stocks in its...
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Finance
A mutual fund focused on the financial services sector has 3 different stocks in its portfolio (Royal Bank, BMO, and CIBC). Royal Bank, BMO and CIBC's stock have betas of 1.1, 1.4, and 1.7 respectively. The mutual fund invested one-third of its money equally in each stock. Each stock has a standard deviation of 15%, and their returns are independent of one another, i.e., the correlation coefficients between each pair of stock is zero. If market is in equilibrium, which of the following is correct? A) The mutual fund's expected return is more than the expected return on CIBC. B) Shifting the portfolio weight by selling BMO and buying Royal Bank will cause the mutual fund to be less volatile. C) The mutual fund is less volatile than the market index such as the TSX. D) The expected return on CIBC is less than the expected return on BMO
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