You want to add an additional stock to your portfolio and are considering two al

Question

You want to add an additional stock to your portfolio and are considering two alternatives. For stock A, the expected return is 14.20% and the beta is 1.62. For stock B, the expected return is 8.40% and the beta is 0.46. The risk-free rate is 4.6% and the expected return on the market portfolio is 11.6%. According to the Capital Asset Pricing Model, which statement about adding these securities to your portfolio is most accurate?

Select one:

a. Add either one, since for both the expected returns exceed required returns.

b. Add only A because its beta is larger than Bs beta.

c. Add only stock B since its expected return is the only one to exceed its required return.

d. Add only stock A since its expected return is the only one to exceed its required return.

e. Add neither, since both have expected returns less than required returns.

Explanation / Answer

a. Add either one, since for both the expected returns exceed required returns

Required return of Stock A= 4.6+ 1.62(11.6-4.6) = 15.94%< 14.20% (expected return)

Required return of Stock B = 4.6+ 0.46 (11.6-4.6) = 7.82%< 8.40% (expected return)

Expected return exceeds in both the cases

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.