Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.)
A) stock b must be a more desirable addition to a portfolio than stock a.
B) stock a must be a more desirable addition to a portfolio than stock b.
C) the expected return on stock a should be greater than that on stock b.
D) the expected return on stock b should be greater than that on stock a.
E) when held in isolation, stock a has greater risk than stock b.

Question

Quizplus · Accepted Answer

The expected return on stock a should be greater than that on stock b.Beta is a measure of systematic risk, which is the risk that cannot be diversified away. A higher beta indicates that a stock is more volatile than the market as a whole. In this case, Stock A has a higher beta than Stock B, which means that it is more volatile. As a result, investors would require a higher expected return on Stock A in order to compensate for the additional risk.

Stock A's Beta Is 1