Final answer:
The correct statement is (d): The expected return on stock A is greater than that on B because Stock A's beta is higher at 1.2, which implies it is riskier and should offer a higher return to compensate for the higher risk.
Step-by-step explanation:
The correct statement, if the CAPM holds, is: d) The expected return on stock A is greater than that on B
Beta is a measure of a stock's volatility compared to the overall market. A beta greater than 1 indicates that the stock is more volatile than the market, while a beta less than 1 indicates that the stock is less volatile than the market.
The question pertains to the Capital Asset Pricing Model (CAPM) and the relationship between Stock A's beta and Stock B's beta, and their expected returns. According to CAPM, the expected return on a stock is directly proportional to its beta. Therefore, a stock with a higher beta is expected to have a higher return because it is taking on more risk.
Given Stock A's beta of 1.2 is higher than Stock B's beta of 0.4, it implies that Stock A is expected to be riskier and thus should offer a higher expected return to compensate for this higher risk. Thus, the correct statement is (d): The expected return on stock A is greater than that on B. Held individually, Stock A would be riskier than Stock B due to its higher beta.