Based on the security market line,Robo-Tech stock has a required return of 14% and Friendly Insurance Company has a required return of 10%.Robo-Tech has a standard deviation of returns of 18%.Therefore,
A) Friendly must have a standard deviation of returns of less than 18% because Friendly is less risky than Robo-Tech.
B) all rational investors will prefer Friendly over Robo-Tech.
C) for a well-diversified investor, Friendly is less risky than Robo-Tech.
D) the beta for Friendly must be greater than the beta for Robo-Tech because Friendly is the better buy for a risk-averse investor.

Question

Quizplus · Accepted Answer

The security market line implies that the expected return for a given stock is related to its beta, which measures its systematic risk. Since Robo-Tech has a higher required return than Friendly, it must have a higher beta. Therefore, Friendly is less risky than Robo-Tech and is a better choice for a well-diversified investor. The standard deviation of returns is not necessarily the only factor to consider when assessing a stock's riskiness.

Based on the Security Market Line,Robo-Tech Stock Has a Required