ECONOMICS
RISK AND RETURN
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Stock A has more unsystematic risk than Stock B.
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Stock B has more systematic risk than Stock A
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If the risk-free rate and the market risk premium are both positive, Stock A has a higher expected return than Stock B according to the CAPM
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Both a and b are true
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Detailed explanation-1: -Answer and Explanation: The calculated value of the required return for the stock is 12%.
Detailed explanation-2: -If a stock had a beta of 0.5, we would expect it to be half as volatile as the market: A market return of 10% would mean a 5% gain for the company. Here is a basic guide to beta levels: Negative beta: A beta less than 0, which would indicate an inverse relation to the market, is possible but highly unlikely.
Detailed explanation-3: -The beta for a stock describes how much the stock’s price moves compared to the market. If a stock has a beta above 1, it’s more volatile than the overall market. For example, if an asset has a beta of 1.3, it’s theoretically 30% more volatile than the market.
Detailed explanation-4: -According to the CAPM, what is the required rate of return for a stock with a beta of 0.7, when the risk-free rate is 7% and the expected market rate of return is 14%? A. 11.9%.