Stock Q Has a Beta (β) Equal to 1

question 55

Multiple Choice

Stock Q has a beta (β) equal to 1.6 and Stock P has a beta equal to 0.8.Based on this information, according to the capital asset pricing model (CAPM) , which of the following statements is correct?

• A)The required rate of return for Stock Q, rQ, should be 1.6 times greater than the required rate of return for Stock P, rP.
• B)The risk premium associated with Stock Q, RPQ, should be 1.6 times greater than the risk premium associated with Stock P, RPP.
• C)The required rate of return for Stock Q, rQ, should be two times greater than the required rate of return for Stock P, rP.
• D)The risk premium associated with Stock Q, RPQ, should be two times greater than the risk premium associated with Stock P, RPP.
• E)None of the above is a correct answer.

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Definitions:

Betas

A metric that assesses the systematic risk or volatility faced by a security or portfolio in contrast to the entire market.

Sharpe Measure

A ratio used to evaluate the risk-adjusted performance of an investment, considering both the return and the volatility of the investment.

Risk-Free Return

The theoretical return on investment with no risk of financial loss, typically associated with government bonds.

Standard Deviations

A statistical measure that quantifies the dispersion or spread of a set of data points relative to its mean, often used in the context of investment returns to measure volatility.