CAPM Analysis of Two Stocks

Medium Portfolio Risk And Return Capital Asset Pricing Model

In the context of the Capital Asset Pricing Model (CAPM), an investor is evaluating two stocks to add to their portfolio. Stock A has an expected return of 12% and a beta of 1.5, while Stock B has an expected return of 10% and a beta of 0.5. The risk-free rate is currently 4%. Using the CAPM formula, which stock offers a better risk-adjusted expected return?

Stock A offers a higher risk-adjusted return.

Stock B offers a better risk-adjusted return.

Both stocks offer the same risk-adjusted return.

Hint

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