Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.)
A) When held in isolation, Stock A has greater risk than Stock B.
B) Stock B must be a more desirable addition to a portfolio than Stock A.
C) Stock A must be a more desirable addition to a portfolio than Stock B.
D) The expected return on Stock A should be greater than that on Stock B.
E) The expected return on Stock B should be greater than that on Stock A.

Question

Quizplus · Accepted Answer

In market equilibrium, a higher beta indicates higher systematic risk and thus a higher expected return according to the Capital Asset Pricing Model (CAPM). Therefore, Stock A with a beta of 1.5 should have a greater expected return than Stock B with a beta of 0.5.

Stock A's Beta Is 1