Question

Stock A's beta is 1.7 and Stock B's beta is 0.7. Which of the following statements must be true about these securities? (Assume market equilibrium.) a. The expected return on Stock B should be greater than that on A. b. Stock B must be a more desirable addition to a portfolio than A. c. Stock A must be a more desirable addition to a portfolio than B. d. When held in isolation, Stock A has more risk than Stock B. e. The expected return on Stock A should be greater than that on B.

Answer 1

D

Step-by-step explanation:

Systemic risk is measured by beta. In the CAPM equation, beta is a positive function of required return, so the higher beta is, the higher the systemic risk and the higher the compensation demanded for by investors.

required return = risk free return + beta x ( market risk premium)

The appropriateness of adding a stock to a portfolio cannot be determined by looking at the stock alone. the stock has to be looked at in context with the total portfolio