Consider the following two stocks, A and B. Stock A has an expected rate of return 10% and beta 1,20. Stock B has an expected rate of return 14% and beta 1,80. The expected market rate of return is 9% and the risk free rate is 5%. Security______would be a good buy because________
1. A, It offers an expected excess return of 0.2%
2. A, It offers an expected excess return of 2.2%
3. B, it offers an expected excess return of 1.8%
4. B, it offers an expected return of 2,4%
5. B, it offers an abnormal return of 1,2%
Required rate of return Re=Rf+Beta*(Rm-Rf)
For stock A, ...
This solution analyzes expected excess return.