Stock A has a required return of 19 percent. Stock B has a required return of 11 percent. Assume a risk-free rate of 4.75 percent. Which of the following is a correct statement about the two stocks?
A) Stock A is riskier.
B) Stock B is riskier.
C) The stocks have the same risk.
D) We would need to know if the markets are efficient to answer this question.

Question

Quizplus · Accepted Answer

Stock A has a higher required return than Stock B, which suggests that investors demand more compensation for taking on more risk associated with Stock A. In the context of the Capital Asset Pricing Model (CAPM), a higher required return implies a higher beta, indicating higher risk compared to Stock B.

Stock a Has a Required Return of 19 Percent