Consider two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.2. Stock B has an expected return of 14% and a beta of 1.8. The expected market rate of return is 9% and the risk-free rate is 5%. Security ________ would be considered the better buy because ________.
A) A; it offers an expected excess return of .2%
B) A; it offers an expected excess return of 2.2%
C) B; it offers an expected excess return of 1.8%
D) B; it offers an expected return of 2.4%

Question

Quizplus · Accepted Answer

α_A = .10 − [.05 + 1.20(.09) - .05] = .002 α_B = .14 − [.05 + 1.80(.09) - .05] = .018

Consider Two Stocks, a and B