Stock a Has a Beta Coefficient (β) Equal to 2

question 68

Multiple Choice

Stock A has a beta coefficient (β) equal to 2.1, and Stock B has a beta coefficient (β) equal to 0.7. 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:

Tax Avoidance

A legal strategy used by individuals and businesses to minimize taxes owed by using deductions, credits, and exemptions within the law.

Bargain Purchase Option

A provision in a lease agreement that allows the lessee to purchase the leased asset at the end of the lease term for a price significantly lower than the expected fair market value.

CRA

Canadian Revenue Agency, an agency that administers tax laws for the Canadian government and for most provinces and territories, or Community Reinvestment Act, a U.S. federal law designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of their communities.