Stock A's beta is 2.1. The risk-free rate is 6%, and the market return is 13%. The expected rate of return of Stock A is 15.5%. Based on the above information, which of the following statements is true?
A) An investor should buy Stock A because its expected rate of return is less than the required rate of return.
B) An investor should buy Stock A because its expected rate of return is more than the required rate of return.
C) An investor should not buy Stock A because its expected rate of return is more than the required rate of return.
D) An investor should not buy Stock A because its expected rate of return is less than the required rate of return.
E) An investor should be indifferent towards buying or selling the stock.

Question

Quizplus · Accepted Answer

The required rate of return using the CAPM formula is 20.7% (6% + 2.1*(13%-6%)). Since the expected return of 15.5% is less than the required return, the stock is not attractive.

Stock A's Beta Is 2