Question

Althea Corp’s stock beta is 1.15 and its standard deviation is 1.95. Bertha Corp’s stock beta is 1.67 and its standard deviation is 0.83. Which of the following statements must be true, assuming the CAPM is correct.

		The expected return of Bertha Corp’s stock will be greater than that of Althea Corp’s stock.
		Althea Corp’s stock is a more desirable addition to a portfolio than Bertha Corp’s stock.
		Bertha Corp’s stock is a more desirable addition to a portfolio than Althea Corp’s stock.
		Bertha Corp’s stock has more total risk than Althea Corp’s stock.
		The expected return of Bertha Corp’s stock is 2.5%.

Which of the following is true?

		None of these
		Corporate yield curves are always upward sloping.
		Corporate yield curves are parallel to the Treasury yield curve.
		Treasury yield curves are always upward sloping.
		Corporate yield curves are always higher than the Treasury yield curve.

Answer 1

1)

As expected return on equity is directly proportional to beta of the stock, a larger beta would mean larger expected return on the stock.It is given by the CAPM model, Rs = Rf + Beta * MRP

Bertha has a higher beta and hence expected to have higher expected return than Althea corp's stock. So the answer is

The expected return of Bertha Corp’s stock will be greater than that of Althea Corp’s stock

2)

As corporate bond yields are always higher than treasury bond yields, the yield curve is also higher than treasury yield curv.

Corporate yield curves are always higher than the Treasury yield curve