Given the Following Information: the Risk-Free Rate Is 7%, the Beta

question 336

Multiple Choice

Given the following information: The risk-free rate is 7%, the beta of stock A is 1.2, the beta of stock B is 0.8, the expected return on stock A is 13.5%, and the expected return on stock B is 11.0%. Further, we know that stock A is fairly priced and that the betas of stocks A and B are correct. Which of the following regarding stock B must be true?

• A) Stock B is also fairly priced.
• B) The expected return on stock B is too high.
• C) The expected return on stock A is too high.
• D) The price of stock B is too high.
• E) The price of stock A is too high.

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Definitions:

Acid-test Ratio

A liquidity ratio that measures a company's ability to pay off its current liabilities with its quick assets (cash, marketable securities, and accounts receivable).

Debt-to-equity Ratio

A financial indicator showing how much of a company's assets are financed by debt compared to shareholders' equity.

Receivable Turnover

A financial ratio that measures how efficiently a company collects its outstanding credit sales, typically calculated annually.

Inventory Turnover

A ratio showing how many times a company's inventory is sold and replaced over a period, indicating efficiency in managing and selling stock.