Generally, which of the following is true?
A) rD rA rE
B) rE rD rA
C) rE rA rD
D) None of the above is true

Question

Generally, which of the following is true?
A) rD > rA > rE
B) rE > rD > rA
C) rE > rA > rD
D) None of the above is true

Quizplus · Accepted Answer

rE represents the expected rate of return on the overall stock market. Historically, the stock market has provided higher returns than individual securities. Therefore, rE should be the highest of the three options.
rA represents the expected rate of return on a specific security given its level of risk (beta). Companies with higher betas are riskier and should provide higher returns to investors. Therefore, rA should be higher than rD for riskier securities.
rD represents the risk-free rate of return, which is usually based on government bonds. As a result, it is typically the lowest of the three options. Therefore, the correct order should be rE > rA > rD.

Generally, Which of the Following Is True