Question
You want to add an additional stock to your portfolio and are considering two alternatives. For stock A, the expected return is 14.20% and the
You want to add an additional stock to your portfolio and are considering two alternatives. For stock A, the expected return is 14.20% and the beta is 1.62. For stock B, the expected return is 8.40% and the beta is 0.46. The risk-free rate is 4.6% and the expected return on the market portfolio is 11.6%. According to the Capital Asset Pricing Model, which statement about adding these securities to your portfolio is most accurate?
Select one:
a. Add either one, since for both the expected returns exceed required returns.
b. Add only A because its beta is larger than Bs beta.
c. Add only stock B since its expected return is the only one to exceed its required return.
d. Add only stock A since its expected return is the only one to exceed its required return.
e. Add neither, since both have expected returns less than required returns.
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