Stock X Has β = 4

question 2

Multiple Choice

Stock X has β = 4.0, which means that it is considered four times riskier than the average stock, or the stock market as a whole.According to the capital asset pricing model, Stock X should earn

• A)a total return that is four times greater than the market return, that is, rX = 4 × rM .
• B)a risk premium that is four times greater than the market risk premium, that is, RPX = 4 × RPM , which means that rX − rRF = 4 × (rM − rRF).
• C)a return that is less than the market return (rM ) because, all else equal, the high risk associated with Stock X will cause its value to decrease.
• D)the risk-free rate of return (rRF).
• E)None of the above is correct.

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