Stock a Has a Beta (β) Equal to 2

question 67

Multiple Choice

Stock A has a beta (β) equal to 2.1 and Stock B has a beta equal to 0.7. 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 A, rA, should be 2.1 times the required rate of return for Stock B, rB.
• B) The risk premium associated with Stock A, RPA, should be 2.1 times the risk premium associated with Stock B, RPB.
• C) The required rate of return for Stock A, rA, should be three times the required rate of return for Stock B, rB.
• D) The risk premium associated with Stock A, RPA, should be three times the risk premium associated with Stock B, RPB.
• E) The required rate of return for Stock A, rA, should be three times the risk premium associated with Stock A, RPA

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Definitions:

Cash Cycle

The cash cycle is a period between the outlay of cash for the purchase of inventory and the receipt of cash from customer sales, measuring the efficiency of a company's cash management.

Accounts Payable Period

The time it takes for a company to pay off its suppliers after a purchase is made, typically measured in days.

Liberal Accounts Receivable Policy

A policy that involves offering lenient credit terms to customers, such as extended periods before payment is due, which can encourage sales but may increase the risk of bad debts.

Operating Cycle

The period it takes for a business to buy inventory, sell products, and collect cash from sales, reflecting the efficiency of a company’s operations.