KAPLAN SCHWESER Kaskin Inc stock has a beta of 12 and Quinn

KAPLAN SCHWESER Kaskin, Inc., stock has a beta of 1.2 and Quinn, Inc., stock has a beta of.6. Which of the following statement:s is most accurate?(LO 7-1) a. The expected rate of return will be higher for the stock of Kaskin, Inc., than that of Quinn, Inc. b. The stock of Kaskin, Inc., has more total risk than Quinn, Inc c. The stock of Quinn, Inc., has more systematic risk than that of Kaskin, Inc. 8 Which of the following statements is true? Explain.(LO 7-1) a. It is possible that the APT is valid and the CAPM is not. b. It is possible that the CAPM is valid and the APT is not.

Solution

(7) The expected rate of return is given by the following equation:

Expected Return = Risk-Free Rate + Beta x (Market Portfolio Return/Benchmark Portfolio Return - Risk-Free Rate)

As is observable the expected rate of return is directly proportional to the stock\'s beta. Hence, Kaskin\'s expected rate of return would be greater than Quinn\'s. Total risk of any stock is determined by the standard deviation of its returns and since no mention of the same is present in the question, the second statement is not accurate. Further, the systematic risk of any stock is measured by the stock\'s beta. Hence, Kaskin has a higher systematic risk as compared to Quinn Inc. Therefore, the most accurate statement is option (a).

NOTE: Please raise a separate query for the solution to the second unrelated question.