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:

Correlation Designs

Research designs used to measure and analyze the relationships between two or more variables without implying causation.

Confirmatory Factor Analysis

A statistical technique used to validate the factor structure of a set of observed variables and to confirm prior hypotheses about their relationships.

Latent Variables

Variables that are not directly observed but are inferred from other variables that are measured directly in research.

Psychometric Properties

Characteristics that describe the quality of psychological tests or measurements, including reliability, validity, and factor structure.