Question

bud is an undiversified investor and is considering two alternative stocks for purchase. stock a has a beta of 0.85 and stock b has a beta of 1.6. if bud expects the stock market to boom next year (strong bull market), which stock should he purchase? a it does not matter; both are equally good. b the one with the most total risk. c stock a d stock b e the one with the highest return standard deviation

Explanation:

Step1: Analyze the relationship between beta and return in a bull market

In a strong bull market, stocks with higher betas tend to have higher returns. Beta measures a stock's volatility in relation to the market. A higher beta means the stock is more volatile and will move more with the market. Since Bud expects a boom (bull market), he should choose the stock with the higher beta.

Step2: Compare the betas of Stock A and Stock B

Stock A has a beta of \(0.85\) and Stock B has a beta of \(1.6\). Since \(1.6>0.85\), Stock B has a higher beta.

Answer:

D. Stock B