Stock A's beta is 1.5 and Stock B's beta is 0.5.Which of the following statements must be true,assuming the CAPM is correct?
A)Stock A would be a more desirable addition to a portfolio than Stock B.
B)In equilibrium, the expected return on Stock B will be greater than that on Stock A.
C)Stock B would be a more desirable addition to a portfolio than Stock A.
D)In equilibrium, the expected return on Stock A will be greater than that on Stock B.

Question

Quizplus · Accepted Answer

According to the Capital Asset Pricing Model (CAPM), the expected return on a stock is directly proportional to its beta. As Stock A's beta is higher than Stock B's beta, it is riskier and needs to offer a higher expected return to compensate for this risk. Hence, in equilibrium, the expected return on Stock A will be greater than that on Stock B. Therefore, option D is the correct answer. Option A and C cannot be determined as desirability depends on individual preferences and goals. Option B is incorrect based on the explanation above.

Stock A's Beta Is 1