Which Stock to Buy Based on Beta Value

Question

Over the next year, expected return on the S&P 500 index (proxy for the optimal risky portfolio), the SMB portfolio, and the HML portfolio are 11%, 6%, and 3%; standard deviation of the returns on the S&P 500 is 27%; risk free return is 2%.

Assuming that the CAPM is the appropriate asset pricing model, you estimate Bargain Buster Stores’ stock beta to be 1.45.

Suppose that your analysis also indicates that Walmart has a beta of 1.3 and an expected return of 12% over the next year. If you were creating a portfolio and could buy only one of these two stocks, which one would you choose and why?

Summary: This question belongs to financial management and discuses about Bargain Buster Stores’ stock beta and Walmart beta.

Total word count: 15