Consider the single-factor APT.Stocks A and B have expected returns of 12% and 14%,respectively.The risk-free rate of return is 5%.Stock B has a beta of 1.2.If arbitrage opportunities are ruled out,stock A has a beta of __________.
A)0.67
B)0.93
C)1.30
D)1.69
E)none of the above

Question

Quizplus · Accepted Answer

Using the single-factor APT formula: 
Expected return = Risk-free rate + (Beta x Risk premium) 
For stock B: 
14% = 5% + (1.2 x Risk premium) 
Risk premium = (14% - 5%) / 1.2 = 7.5% 
For stock A: 
Expected return = 5% + (Beta x 7.5%) 
12% = 5% + (Beta x 7.5%) 
Beta = (12% - 5%) / 7.5% = 0.93, which is closest to choice B.

Consider the Single-Factor APT