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.(Select the best answer below.)

A.True. Using the CAPM formula to check to see if the expected return for Stock 2 is twice as big as the expected return for Stock 1, you must multiply the equation for the expected return of Stock 2 by 1 to see if it equals the equation for the expected return of Stock 1. Once the calculations are done, it is clear that this equation is not equal to the equation for the expected return of Stock 2, as long as

Rf

is not zero.

B.

True. Using the CAPM formula to check to see if the expected return for Stock 2 is twice as big as the expected return for Stock 1, you must multiply the equation for the expected return of Stock 1 by 2 to see if it equals the equation for the expected return of Stock 2. Once the calculations are done, it is clear that this equation is equal to the equation for the expected return of Stock 2.

C.

False. Using the CAPM formula to check to see if the expected return for Stock 2 is twice as big as the expected return for Stock 1, you must multiply the equation for the expected return of Stock 1 by 2 to see if it equals the equation for the expected return of Stock 2. Once the calculations are done, it is clear that this equation is equal to the equation for the expected return of Stock 2, but that does not prove that the return will be double.

D.False. Using the CAPM formula to check to see if the expected return for Stock 2 is twice as big as the expected return for Stock 1, you must multiply the equation for the expected return of Stock 1 by 2 to see if it equals the equation for the expected return of Stock 2. Once the calculations are done, it is clear that this equation is not equal to the equation for the expected return of Stock 2, as long as Rf is not zero.