Ask Question
10 September, 00:13

Stock A has a return volatility of 10% and a beta of 0.9. Stock B has a return volatility of 20% and a beta of 0.6. According to the CAPM, which of the following statements is true?

A. Stock A should have a higher expected return.

B. Stock B should have a higher expected return.

C. Stock A's expected return should be higher than that of the market portfolio.

D. Not enough information is provided.

+1
Answers (1)
  1. 10 September, 03:39
    0
    A. Stock A should have a higher expected return.

    Explanation:

    Capital Asset Pricing Model (CAPM) formula is used to calculate expected return of a stock and the formula is as follows;

    CAPM; r = risk free rate + beta (Market risk premium)

    Since beta is in the CAPM and determines the rate of return, we will use beta to compare these two stocks. The higher the beta, the higher the rate of return. Stock A has a beta of 0.9 which is higher than that of B (0.6). Therefore, stock A's stock return will be higher than that of B but lower than the market return since beta of the market is 1.0.
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “Stock A has a return volatility of 10% and a beta of 0.9. Stock B has a return volatility of 20% and a beta of 0.6. According to the CAPM, ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers