Consider the single-factor APT. Stocks A and B have expected returns of 15% and 18%, respectively. The risk-free rate of return is 6%. Stock B has a beta of 1.0. If arbitrage opportunities are ruled out, stock A has a beta of
A) 0.67.
B) 1.00.
C) 1.30.
D) 1.69.
E) 0.75.

Question

Quizplus · Accepted Answer

Stock B's E(R_P) = 1 × (0.18 - 0.06) = 0.12 or 12%. Stock A's E(R_M) = (0.15 - 0.06) = 0.09 or 9%. Therefore stock A's beta must equal 0.09/0.12 = 0.75.

Consider the Single-Factor APT