Question
Security A has an expected return of 12.2% and a beta of 1.23 . Security B has an expected return of 13.9 % and a
Security A has an expected return of 12.2% and a beta of 1.23. Security B has an expected return of 13.9% and a beta of 1.81. The expected market rate of return is 10.5% and the risk free rate is 3.5%. If CAPM is the relevant pricing model, which security would you consider a better buy? Multiple Choice
Security B because it's alpha at 2.27% is higher than Security A's at -0.09%.
Security A because it's alpha at 0.09% is higher than Security B's at -2.27%.
Security A because it's alpha at 0.09 is higher than Security B's at -1.34%.
Security B because it's alpha at 1.34% is higher than Security A's at -0.09%.
Based on the CAPM, neither is clearly superior.
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