Question

If CAPM holds, Stock A and Stock B have the same covariance with market return. Which...

If CAPM holds, Stock A and Stock B have the same covariance with market return. Which statement would be false?

A) Expected returns will be the same

B) Actual returns will be the same

C) both will have the same Beta

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Answer #1

Answer C is correct. Both will have same beta.

Covariance measures how 2 variables move together. In stock market context, it helps in determing the movement in two asset prices. If botth Stock A and Stock B have the same covariance with market return, it means they both move in the same direction and in the same proportion with respect to market return.

Beta means the change in the stock return with respect to change in market return. Therefore Stock A and Stock b will have the same beta, if they both change in the same proportion with respect to change in the market return  

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