Indicate whether each statement is true or false, and provide an explanation for your answer.

a. A stock is completely uncorrelated with the overall market. This stock will have an expected return equal to the risk-free rate.

b. Stock 1 has a beta of 1.0, and stock 2 has a beta of 2.0. The return on stock 2 will be double the return on stock 1.

c. A certain stock bounces around quite a lot, but its movements have a negative correlation with the overall market. The expected return on this stock will be greater than the risk-free rate.

a. A stock is completely uncorrelated with the overall market. This stock will have an expected return equal to the risk-free rate. (Select the best answer below.)

A.

False. If the stock is uncorrelated with the market then it has a zero beta. The CAPM says that a stock with a zero beta has an expected return equal to the risk-free rate.

B.

True. If the stock is uncorrelated with the market then it has a beta of 1. The CAPM says that a stock with a beta of 1 has an expected return equal to the risk-free rate.

C.

False. If the stock is uncorrelated with the market then it has a zero beta. The CAPM says that a stock with a beta less than 0 has an expected return equal to the risk-free rate.

D.

True. If the stock is uncorrelated with the market then it has a zero beta. The CAPM says that a stock with a zero beta has an expected return equal to the risk-free rate.

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