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

Question

Quizplus · Accepted Answer

In 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 higher expected return than Stock B, which has a beta of 0.5.

Stock a Has a Beta of 1