Given Are the Following Two Stocks a and B If the Expected Market Rate of Return Is 0

Given are the following two stocks A and B: $\begin{array}{lll}\text { Security } & \text { Expected Rate of return } & \text { Beta } \\\text { A } & 0.12 & 1.2 \\\text { B } & 0.14 & 1.8\end{array}$
If the expected market rate of return is 0.09, and the risk-free rate is 0.05, which security would be considered the better buy, and why?

A) A because it offers an expected abnormal return of 1.2%.
B) B because it offers an expected abnormal return of 1.8%.
C) A because it offers an expected abnormal return of 2.2%.
D) B because it offers an expected return of 14%.
E) B because it has a higher beta.

Correct Answer:

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