Please shortly explain how they arrived at the answers below? Stock A has a beta

Question

Please shortly explain how they arrived at the answers below? Stock A has a beta of 1.5, and stock B has a beta of 1.0. Determine whether each of the statements below is true or false.
a.   Stock A must have a higher standard deviation than Stock B.                                      False
b.   Stock A has a higher expected return than Stock B.                                                      True
c.   The expected return on Stock A is 50 percent higher than the expected return on B. False  

Explanation / Answer

As per CAPM ,

expected return of stock = risk free rate + beta * ( market risk premium)

A) Above equation gives us an expected value of return. It is not possible to determin standard deviation of a stocks return using beta. Thus it cannot be conclusively said that standard deviation of A's return is greater than thant of B although A's beta is greater

B) Greater the Beta greater the expected return as can be seen in the equation above, since risk free rate and market risk premium remains the same for both

c) Assuming risk free rate as 1 % and Market risk premium as 2%

return on A = 1 + 1.5* 2 = 4%

return on B = 1 + 1 * 2 = 3%

return of A is ( 4-3 )3 = 33.33% , thus C is false

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