Suppose that Stock A has a beta of 0

Finance Dec 01, 2020

Suppose that Stock A has a beta of 0.7 and Stock B has a beta of 1.2. Which stock should have a higher actual return next year according to the capital asset pricing model? Please explain briefly

Expert Solution

Stock B has higher actual return for next year due to higher return because return is calculated by following formula in CAPM

=rf+Beta(rm-rf).

So from formula it's clear that high beta high return.

Example let rf=7%

rm=10%

Return on

Stock A=7+0.7(10-7)=9.1%

Stock B=7+1.2(10-7)=10.6%.

So stock B generate more return.

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