Stock a Is a Risky Asset That Has a Beta

question 46

Multiple Choice

Stock A is a risky asset that has a beta of 1.4 and an expected return of 13.2 percent.Stock B is also a risky asset and has a beta of 1.25.The risk-free rate is 5.5 percent.Assuming both stocks are correctly priced,what is the expected return on stock B?

• A) 11.90 percent
• B) 12.11 percent
• C) 12.29 percent
• D) 12.38 percent
• E) 12.46 percent

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Definitions:

Flat Tax

A tax system with a constant tax rate applied to all levels of income, opposing progressive tax systems where rates increase with income.

Tax Burden

The measure of the total amount of taxes that an individual or business must pay, expressed as a percentage of income or profits.

Average Tax Rate

The proportion of the total tax paid to the total taxable income, calculated by dividing the total tax amount by the taxable income.

Marginal Tax Rate

The percentage of tax applied to your income for each tax bracket in which you qualify, essentially the rate at which your last dollar of income is taxed.