Althea Corp’s stock beta is 2.13 and its standard deviation is 1.8. Bertha Corp’s stock beta...
Althea Corp’s stock beta is 2.13 and its standard deviation is 1.8. Bertha Corp’s stock beta is 1.67 and its standard deviation is 1.95. Which of the following statements must be true, assuming the CAPM is correct.
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Althea Corp’s stock has more total risk than Bertha Corp’s stock. |
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Althea Corp’s stock is a more desirable addition to a portfolio than Bertha Corp’s stock. |
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The expected return of Althea Corp’s stock will be greater than that of Bertha Corp’s stock. |
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The expected return of Bertha Corp’s stock is 3.62%. |
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Bertha Corp’s stock is a more desirable addition to a portfolio than Althea Corp’s stock. |
Homework Answers
The correct statement is
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The expected return of Althea Corp’s stock will be greater than that of Bertha Corp’s stock. |
As per CAPM, expected return on stock = Risk free rate + beta*market risk premium
Hence, stock with higher beta will provide higher return
DEsirable addition to portfolio will be based on correlation coefficient
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