Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which...
Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which of the following statements MUST BE TRUE about these securities, for all investors? (Assume the market is in equilibrium.) Group of answer choices
Stock A’s return will always be three times higher than Stock B’s return.
Stock B would be a more desirable addition to a portfolio than Stock A.
Stock A would be a more desirable addition to a portfolio than Stock B.
The long-term expected return of Stock A will be greater than that of Stock B.
The long-term expected return of Stock B will be greater than that of Stock A.
Homework Answers
The long-term expected return of Stock A will be greater than that of Stock B.
As per CAPM Model,
Expected Return = Rf + Beta(Rm - Rf)
As Stock A has higher beta, it's expected return will be higher.
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