Given the information in the table below, which of the following statements is correct, assuming that either security will be held in a portfolio with other investments? Stock Expected Return Required Return Beta Standard Deviation A 10% 12% 0.9 25% B 8% 5% 0.3 35% Question 26 options: The investor should purchase both stocks because their beta is less than that of the market. The investor should purchase A since its risk, as measured by standard deviation, is the lowest. The investor should purchase A because it requires the highest rate of return. The investor should purchase B since its expected return exceeds its required return.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Given the information in the table below, which of the following statements is correct, assuming that either security will be held in a portfolio with other investments?
| Stock | Expected Return | Required Return | Beta | Standard Deviation |
| A | 10% | 12% | 0.9 | 25% |
| B | 8% | 5% | 0.3 | 35% |
Question 26 options:
|
|
The investor should purchase both stocks because their beta is less than that of the market. |
|
|
The investor should purchase A since its risk, as measured by standard deviation, is the lowest. |
|
|
The investor should purchase A because it requires the highest |
|
|
The investor should purchase B since its expected return exceeds its required return. |
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
