Answer: Option e is correct.
According to the equation of capital asset pricing model
(CAPM):
Expected return=Risk free rate +Beta*(Market risk premium)
So, from the equation we can see that the stock with higher value
of beta will have higher expected return.
The beta of stock A is higher than the beta of stock B.
Hence, in equilibrium, the expected return on stock A will be
greater than that on stock B.
Option a and b are not correct because there are many factors
that govern the addition of a stock to a portfolio, only higher or
lower beta values does not make a stock desirable or
undesirable.
Option c is not correct because beta is measured with respect to
market. When held in isolation, we cannot say that Stock A has more
risk than Stock B.
Option d is not correct because as the beta value is more for stock
A, its expected return will be more that stock B.