Consider the following information:
Stock A Stock B T-bills
Beta 0.6 1.2 0.0
Expected return, % 5.0 8.0 2.0
(a) Assuming that all stocks are priced correctly according to the CAPM.
(b) Compute the expected return on the market portfolio.
(c) Is it possible for a stock to have a negative standard deviation in returns? Explain.
(d) Consider two separate stocks: the returns on the stock of AppleCo have a standard deviation of 32% and a beta of 0.9; the returns on the stock of BananaCo have a standard deviation of 20% and a beta of 1.2. Which company's stock should provide a greater return to investors? Why?