Stock A has a beta of 1.50 and an expected risk premium of 8%. Stock B has a beta of 0.85 and an expected risk premium of 5%. If the market risk premium is 5.5%, would a rational investor prefer to invest in stock A or stock B? (hint: think in terms of alpha)

Multiple Choice

• a rational investor would prefer Stock B over Stock A

• a rational investor would prefer Stock A over Stock B

• a rational investor would prefer each equally

• it would depend on the investors level of risk aversion