IBM has a beta of 1.0 and Apple Computer has a beta of 3.0.Which of the following statements must be correct?
A)The market risk premium for Apple must be larger than the market risk premium of IBM.
B)If investors become more risk averse, the expected return of Apple will increase more than the expected return on IBM.
C)Apple's expected rate of return must be three times as large as IBM's.
D)None of these statements is correct.

Question

Quizplus · Accepted Answer

Beta measures the relative market risk of a stock compared to the overall market, which is represented by a beta of 1.0. The higher the beta, the more volatile the stock is expected to be. Since Apple has a beta of 3.0, it is expected to have higher market risk compared to IBM, which has a beta of 1.0. However, the statements A and C are not necessarily correct because beta alone does not determine the size of the market risk premium or expected rates of return. Statement B is correct because if investors become more risk averse, they are likely to demand a higher return for investing in a riskier stock like Apple, which has a higher beta. Therefore, the expected return of Apple will increase more compared to IBM.

IBM Has a Beta of 1