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 are correct.

Question

Quizplus · Accepted Answer

According to the CAPM model, a higher beta implies higher systematic risk and therefore a higher expected return. However, if investors become more risk averse, they will demand a higher expected return on all stocks, but the effect will be greater for high beta stocks like Apple. Therefore, statement B is correct. Statement A cannot be determined from the information given, as the size of the market risk premium is not related to the beta of a stock. Statement C is not correct, as the expected rate of return is determined by the risk-free rate, the market risk premium, and the beta, not just the beta. Therefore, the information given is not sufficient to compare the expected returns of IBM and Apple.

IBM Has a Beta of 1