Based on the security market line, company C-A stock has a required return of 7%

Question

Based on the security market line, company C-A stock has a required return of 7% and company C-B has a required return of 5%. C-A has a standard deviation of returns of 9%. Therefore:

A) C-B must have a standard deviation of returns of less than 9% because C-B is less risky than C-A.
B) the beta for C-B must be greater than the beta for C-A because C-B is the better buy for a risk-averse investor.
C) all rational investors will prefer C-B over C-A.
D) for a well-diversified investor, C-B is less risky than C-A.

Explanation / Answer

C) all rational investors will prefer C-B over C-A.

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