Which of the following statements is more likely to be correct concerning the statement,"Stock A has a higher expected return than stock B"?
A) Stock A has more unique risk.
B) Stock B plots below the security market line.
C) Stock B is a cyclical stock.
D) Stock A has a higher beta.

Question

Quizplus · Accepted Answer

The statement indicates that Stock A has a higher expected return than Stock B which means that Stock A is expected to provide a higher return per unit of risk. The beta of a stock measures its sensitivity to market movements and is a measure of the systematic risk of the stock. Stock A having a higher expected return than Stock B implies that Stock A has a higher beta, and therefore, a higher systematic risk. This makes option D the most likely correct choice. The other options have no direct relation to the statement about the expected returns of the stocks.

Which of the Following Statements Is More Likely to Be