Given Are the Following Two Stocks a and B If the Expected Market Rate of Return Is 0

question 38

Multiple Choice

Given are the following two stocks A and B: $\begin{array}{lll}\text { Security } & \text { Expected Rate of return } & \text { Beta } \\\text { A } & 0.12 & 1.2 \\\text { B } & 0.14 & 1.8\end{array}$
If the expected market rate of return is 0.09, and the risk-free rate is 0.05, which security would be considered the better buy, and why?

• A) A because it offers an expected abnormal return of 1.2%.
• B) B because it offers an expected abnormal return of 1.8%.
• C) A because it offers an expected abnormal return of 2.2%.
• D) B because it offers an expected return of 14%.
• E) B because it has a higher beta.

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Definitions:

Close Substitutes

Products or services that can easily replace one another in the eyes of consumers, leading to competitive market dynamics.

Positive Profits

Positive profits occur when a business's total revenues exceed its total costs, indicating financial gain from its operations.

Long Run

Refers to a period where all factors of production and costs can be variable, allowing firms to adjust to changes in the business environment fully.

Short Run

A period in which at least one factor of production is fixed, allowing limited adjustments to changes in production or the business environment.