Given the following two stocks A and B $$\begin{array} { l c c }
\text { Security } & \text { Expected rate of return } & \text { Beta } \
\hline\text { A } & 0.12 & 1.2 \
\text { B } & 0.14 & 1.8
\end{array}$$
If the expected market rate of return is 0.09 and the risk-free rate is 0.05,which security would be considered the better buy and why?
A) A because it offers an expected excess return of 1.2%.
B) B because it offers an expected excess return of 1.8%.
C) A because it offers an expected excess return of 2.2%.
D) B because it offers an expected return of 14%.
E) B because it has a higher beta.

Question

Given the following two stocks A and B $$\begin{array} { l c c } 
\text { Security } & \text { Expected rate of return } & \text { Beta } \
\hline\text { A } & 0.12 & 1.2 \
\text { B } & 0.14 & 1.8
\end{array}$$
If the expected market rate of return is 0.09 and the risk-free rate is 0.05,which security would be considered the better buy and why?
A) A because it offers an expected excess return of 1.2%.
B) B because it offers an expected excess return of 1.8%.
C) A because it offers an expected excess return of 2.2%.
D) B because it offers an expected return of 14%.
E) B because it has a higher beta.

Quizplus · Accepted Answer

Security A offers an expected excess return of 2.2% (0.12 - (0.05 + 1.2*(0.09-0.05))) which is higher than the expected excess return of Security B.

Given the Following Two Stocks a and B If the Expected Market Rate of Return Is 0