USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

-Refer to Exhibit 9.18. Based on the analyst's estimated return and the stocks' betas the analyst should
A) sell both Stock X and Stock Y.
B) sell Stock X and Buy Stock Y.
C) buy Stock X and Sell Stock Y.
D) buy both Stock X and Stock Y.
E) None of these are correct.

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 9.18. Based on the analyst's estimated return and the stocks' betas the analyst should
A) sell both Stock X and Stock Y. 
B) sell Stock X and Buy Stock Y. 
C) buy Stock X and Sell Stock Y. 
D) buy both Stock X and Stock Y. 
E) None of these are correct.

Quizplus · Accepted Answer

Stock X has a higher beta than Stock Y, but a lower expected return. This means that Stock X is riskier than Stock Y, but it is not expected to generate as much return. Therefore, the analyst should sell Stock X and buy Stock Y.