Stock X has 3 units of systematic risk and 2 units of unsystematic risk while Stock Y has 3 units of systematic risk and 4 units of unsystematic risk.If Stock X is priced to generate an 8% return for investors then what do we know about the return that Stock Y should be priced to return?

Question

Quizplus · Accepted Answer

Both stocks have the same level of systematic risk, which is the risk that affects the entire market and is compensated by the market. Unsystematic risk is diversifiable and does not affect the expected return in a well-diversified portfolio. Therefore, Stock Y should also be priced to return 8%.

Stock X Has 3 Units of Systematic Risk and 2