Question
You must choose between investing in Stock A or Stock B. You have already used CAPM to calculate the rate of return you should expect
You must choose between investing in Stock A or Stock B. You have already used CAPM to calculate the rate of return you should expect to receive for each stock given each ones systematic risk and decided that the expected return for both exceeds that predicted by CAPM by the same amount. In other words, both are equally attractive investments for a diversified investor. However, since you are still in school and do not have a lot of money, your investment portfolio is not diversified. You have decided to invest in the stock that has the highest expected return per unit of total risk. If the expected return and standard deviation of returns for Stock A are 11 percent and 30 percent, respectively, and the expected return and standard deviation of returns for Stock B are 20 percent and 40 percent, respectively, which should you choose? Assume that the risk-free rate is 5 percent. (Round answers to 3 decimal places, e.g. 52.750.) Stock A Stock B Highest expected return per unit of risk enter a number rounded to 3 decimal places enter a number rounded to 3 decimal places You should invest in select a stock because it has the select between highest and lowest expected return per unit of risk.
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