Question

Stock X has a beta of 0.5 and Stock Y has a beta of 1.20. Which of the following statements must be true about these securities? (Assume the market is in equilibrium.)

a.   The required return on Stock Y will be greater than that on Stock X.
b.   The required return on Stock X and Stock Y will be the same.
c.   Stock X would be a more desirable addition to a portfolio than Stock Y.
d.   When held in isolation, Stock Y has more risk than Stock X.
e.   Stock Y would be a more desirable addition to a portfolio than Stock X.

Answer 1

a.   The required return on Stock Y will be greater than that on Stock X.

Option B is incorrect because returns depend on beta

Option C is incorrect because desirability depends on expected return versus required return

Option D is incorrect because in isolation the risk should be measured by standard deviation and not beta

Option E is incorrect because desirability depends on expected return versus required return