Question

You must choose between investing in Stock A or Stock B. You have already used CAPM to calculate the rate of return you should expect to receive for each stock given each one's systematic risk and decided that the expected return for both exceeds that predicted by CAPM by the same amount. In other words, both are equally attractive investments for a diversified investor. However, since you are still in school and do not have a lot of money, your investment portfolio is not diversified. You have decided to invest in the stock that has the highest expected return per unit of total risk If the expected return and standard deviation of returns for Stock A are 8 percent and 30 percent, respectively, and the expected return and standard deviation of returns for Stock B are 17 percent and 40 percent, respectively, which should you choose? Assume that the risk-free rate is 5 percent. (Round answers to 3 decimal places, e.9. 52.750.) Stock A Stock B Highest expected return per unit of risk You should invest in because it has the expected return per unit of risk.

Answer 1