Given the following two stocks A and B $$\begin{array} { | l | l | l | }
\hline \text { Security } & \text { Expected rate of return } & \underline { \text { Beta } } \
\hline \text { A } & 0.12 & 1.2 \
\hline \text { B } & 0.14 & 1.8 \
\hline
\end{array}$$ 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 the following two stocks A and B $$\begin{array} { | l | l | l | } 
\hline \text { Security } & \text { Expected rate of return } & \underline { \text { Beta } } \
\hline \text { A } & 0.12 & 1.2 \
\hline \text { B } & 0.14 & 1.8 \
\hline
\end{array}$$ 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

Security A offers an expected excess return of 2.2% calculated using the Capital Asset Pricing Model (CAPM): Expected return = Risk-free rate + Beta * (Market return - Risk-free rate). For A: 0.05 + 1.2 * (0.09 - 0.05) = 0.098. Excess return = 0.12 - 0.098 = 0.022 or 2.2%.

Given the Following Two Stocks a and B If the Expected Market Rate of Return Is 0