Question

(2) Apple stock has a market beta of 2 and Facebook stock has a market beta of 1. The risk-free rate is 5% and the market return is 10%. Which of the following statements is incorrect:

1. Apple stock has more firm-specific risk than Facebook stock
2. Apple stock has a higher expected rate of return than the market
3. Apple stock has more systematic risk than Facebook stock

Answer 1

Expected Return =

Apple Expected Return

= 5% + 2(10% -2%)

= 5% + 16%

= 21%

Facebook   = 5% + 1(10% -2%)

= 5% + 8%

= 13%

Apple has higher expected return.

Also, beta is the systematic Risk and Apple has beta of 2 while beta of Facebook is 1. Apple has more systematic Risk than Facebook stock.

Option A is correct. Because Apple stock does not have more firm-specific risk than Facebook stock.

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