Please read the question below from Schweser test bank. I disagree with the answer. Kaskin, Inc., stock has a beta of 1.2 and Quinn, Inc., stock has a beta of 0.6. Which of the following statements is most accurate? A) The stock of Kaskin, Inc., has more total risk than Quinn, Inc. B) The expected rate of return will be higher for the stock of Kaskin, Inc., than that of Quinn, Inc. C) The stock of Quinn, Inc., has more systematic risk than that of Kaskin, Inc. Your answer: A was incorrect. The correct answer was B) The expected rate of return will be higher for the stock of Kaskin, Inc., than that of Quinn, Inc. Beta is a measure of systematic risk. Since only systematic risk is rewarded, it is safe to conclude that the expected return will be higher for Kaskin’s stock than for Quinn’s stock. My comments: Say the risk premium for K = 4% and Q=10%, then Q would have the higher return not K. Is not correct to say K has total more risk since it has the higher beta??
Market Risk premium = Rm - Rf – which will be the same for both companies. Equity Risk Premium = Beta * (Rm - Rf) which will differ for the two companies because of the Beta component. and since r=rf + Equity Risk Premium -> r expected rate of return would be different.
You need to assume that both stock have same rfr and risk premium. No need to go deep in this.
With A, it asks for total risk (systematic and unsystematic). Beta will provide no insight into unsystematic risk, and cannot say A is correct.
Because we’ve diversified away any asset risk by holding the market portfolio. Why are we learning this theoretical nonsense again?