Question

If the value of beta for the firm VIC is greater than one, then

Select one:

The expected returns for VIC are lower than the market returns

The expected returns for VIC are greater than the market returns

The expected returns for VIC are equal to the market returns

Answer 1

Beta of VIC firm is more than 1. wheras Market beta is always 1.

Expected return of firm as per CAPM = risk free rate +(Beta*(market return - risk free rate))

take assumed figures: RF = 2%, Market return = 6% Beta of VIC = 1.2

Then expected return of VIC = 2%+(1.2*(6%-2%))

=6.8%

As we can see that Market return is 6% while Expected return of VIC is more than market return 6%

So correct statement is b, The expected returns for VIC are greater than the market returns