Given are the following two stocks A and B: If the expected market rate of return is 0.09 and the risk-free rate is 0.05, which security would be considered the better buy and why
A)A because it offers an expected excess return of 1.2%.
B)B because it offers an expected excess return of 1.8%.
C)A because it offers an expected excess return of 2.2%.
D)B because it offers an expected return of 14%.
E)B because it has a higher beta.

Question

Given are the following two stocks A and B:  If the expected market rate of return is 0.09 and the risk-free rate is 0.05, which security would be considered the better buy and why
A)A because it offers an expected excess return of 1.2%. 
B)B because it offers an expected excess return of 1.8%. 
C)A because it offers an expected excess return of 2.2%. 
D)B because it offers an expected return of 14%. 
E)B because it has a higher beta.

Quizplus · Accepted Answer

A's excess return is expected to be 12% - [5% + 1.2(9% - 5%)] = 2.2%.B's excess return is expected to be 14% - [5% + 1.8(9% - 5%)] = 1.8%.

Given Are the Following Two Stocks a and B