The Reward-To-Risk Ratio for Stock a Is Less Than the Reward-To-Risk

question 31

Multiple Choice

The reward-to-risk ratio for Stock A is less than the reward-to-risk ratio of Stock B. Stock A has a beta of .82 and Stock B has a beta of 1.29. This information implies that:

• A) Stock A is riskier than Stock B and both stocks are fairly priced.
• B) Stock A is less risky than Stock B and both stocks are fairly priced.
• C) either Stock A is underpriced or Stock B is overpriced or both.
• D) either Stock A is overpriced or Stock B is underpriced or both.
• E) both Stock A and Stock B are correctly priced since Stock A is less risky than Stock B.

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Definitions:

Contract Curve

In economics, the locus of points representing the set of mutually beneficial (Pareto optimal) allocations of goods or resources between two or more individuals.

Individuals

Persons or entities regarded as single and distinct from a group, often considered in terms of legal rights, responsibilities, and social roles.

Edgeworth Box

A diagram used in economics to show the distribution of resources and the potential for gains from trade between two individuals or entities.

Efficient Allocation

An optimal distribution of resources where it is impossible to make someone better off without making someone else worse off.