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

Given the following two stocks A and B $$\begin{array} { | l | l | l | } \hline \text { Security } & \text { Expected rate of return } & \underline { \text { Beta } } \\\hline \text { A } & 0.12 & 1.2 \\\hline \text { B } & 0.14 & 1.8 \\\hline\end{array}$$ 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 excess return of 1.2%.
B) B because it offers an expected excess return of 1.8%.
C) A because it offers an expected excess 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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