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

question 129

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:

Unequal-variances Test

Statistical tests used when comparing two groups that are assumed not to have the same variance.

Student T-distributed

Pertaining to a probability distribution used in statistics for estimating population parameters when the sample size is small and population variance is unknown.

Population Variances

Measures of the spread or distribution of a set of data points in a population, quantifying the degree to which these points differ from the population mean.

Sample Variance

A measure of the dispersion or spread of a set of data points around their mean, calculated as the sum of the squared deviations from the mean, divided by the number of observations minus one.