Stock A's beta is 1.7 and Stock B's beta is 0.7. Which of the following statements must be true, assuming the CAPM is correct.
A) in equilibrium, the expected return on stock b will be greater than that on stock a.
B) when held in isolation, stock a has more risk than stock b.
C) stock b would be a more desirable addition to a portfolio than a.
D) in equilibrium, the expected return on stock a will be greater than that on b.
E) stock a would be a more desirable addition to a portfolio then stock b.

Question

Quizplus · Accepted Answer

According to the CAPM, a higher beta indicates higher systematic risk and thus a higher expected return. Therefore, Stock A, with a beta of 1.7, should have a higher expected return than Stock B, with a beta of 0.7.

Stock A's Beta Is 1