The risk-free rate of return is 4 percent, and the market return is 10 percent. The betas of Stocks A, B, C, D, and E are 0.85, 0.95, 1.20, 1.35, and 0.5, respectively. The expected rates of return for Stocks A, B, C, D, and E are 8 percent, 9 percent, 10 percent, 14 percent, and 6 percent, respectively. Which stock should a rational investor purchase?
A)A
B)B
C)C
D)D
E)E

Question

Quizplus · Accepted Answer

The expected rate of return for Stock D is the highest among all the stocks at 14 percent, which indicates that the market has the highest expectations from this stock's performance. Additionally, it has the highest beta, which means it is the most sensitive to market fluctuations. As a rational investor who seeks to maximize returns, Stock D should be purchased.

The Risk-Free Rate of Return Is 4 Percent, and the Market