Question

Stock A’s beta is 1.5 and Stock B’s beta is 0.5. Which of the following statements must be true, assuming the CAPM is correct. A. Stock A is riskier to hold than Stock B. B. Stock A pays a higher risk premium than stock B. C. Stock B would be a better choice to add to a portfolio than A. D. The systematic risk of stock B is higher than stock A.

          Stock A’s beta is 1.5 and Stock B’s beta is 0.5. Which of the following statements must be true, assuming the CAPM is correct. A. Stock A is riskier to hold than Stock B. B. Stock A pays a higher risk premium than stock B. C. Stock B would be a better choice to add to a portfolio than A. D. The systematic risk of stock B is higher than stock A.
        
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Horngren’s Cost Accounting
Horngren’s Cost Accounting
Srikant M. Datar, Madhav V. Rajan 16th Edition
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Stock A’s beta is 1.5 and Stock B’s beta is 0.5. Which of the following statements must be true, assuming the CAPM is correct. A. Stock A is riskier to hold than Stock B. B. Stock A pays a higher risk premium than stock B. C. Stock B would be a better choice to add to a portfolio than A. D. The systematic risk of stock B is higher than stock A.
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Transcript

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00:02 Hello, this question is about beta of different stocks.
00:06 We know that in the stock market, systematic risk is common to all stocks.
00:14 And for this reason, it's also known as the market risk is non -diversifiable.
00:24 So, beta is the measure of systematic risk.
00:27 A beta of 1 is considered standard.
00:32 And the higher is the beta of a stock, the riskier that stock is and the more return it is expected to generate.
00:46 So using this, let's try to answer to your question.
00:53 And let's explore all answer options.
00:56 Let's start with a.
01:01 When held in isolation, stock a has more risk than stock b.
01:10 But it's not about isolation.
01:13 We compare stock a with stock b, so this one is not correct.
01:22 There is nothing about isolation, so we cannot just compare our risks.
01:29 Okay, answer b, stock b must be a more desirable addition to a portfolio than a.
01:39 We don't know about this, so we need the values of beta to compare the expected returns, but we don't know which stock is more desirable for different people.
01:55 Different agents are different, some of them prefer more riskier stocks, some of them, of them try to avoid risk so we don't know about this.
02:04 B is not correct.
02:06 C...
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