1. Stock A\'s beta is 1.7 and Stock B\'s beta is 0.7. Which of the following sta

Question

1.        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.        Stock B must be a more desirable addition to a portfolio than A.

b.       Stock A must be a more desirable addition to a portfolio than B.

c.        The expected return on Stock A should be greater than that on B.

d.       The expected return on Stock B should be greater than that on A.

e.        When held in isolation, Stock A has more risk than Stock B.

Explanation / Answer

The market's beta coefficient is 1.00. Any stock with a beta higher than 1.00 is considered more volatile than the market, and therefore riskier to hold, whereas a stock with a beta lower than 1.00 is expected to rise or fall more slowly than the market.a stock with a beta of 0.75 is likely to rise or fall 0.75 per cent if the market rises or falls 1.00 per cent . As higher the risk in stock A, so higher the expected returm. So correct answer is .C The expectedreturn on Stock A shouldbe greater than that on B

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