Consider two shares, A and B. Share A has an expected return of 10% and a beta of 1.20. Share B has an expected return of 14% and a beta of 1.80. The expected market rate of return is 9% and the risk-free rate is 5%. Which security would be considered a better buy and why? Choose one of the following options.

(a) A is a better buy because it offers an expected return of 2.4% greater than B; and Jensen alpha is 0.118% for A and 0.2% for B respectively.

(b) *B is a better buy because it offers an expected return of 2.4% greater than A; and Jensen alpha is 1.8% for B and 0.2% for A respectively.

(c) B is a better buy because it offers an expected return of 2.4% greater than A; and Jensen alpha is 11.8% for B and 2% for A respectively.

(d) A is a better buy because it offers an expected return of 0.24% greater than B; and Jensen alpha is 11.8% for A and 2% for B respectively.

(e) A is a better buy because it offers an expected return of 0.25% greater than B; and Jensen alpha is 25.5% for A and 22% for B respectively.

Answer rating: 100% (QA)

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