Suppose stock A has E(rA)=10% and sigmaA=10%, and stock B has E(rB)=10% and sigmaB=20%. In the CAPM, does anyone hold B?
- Yes, because I can get diversification benefits from holding both
- No, because I get a better risk-return tradeoff with A
- No, because B is riskier
- No, because since B has a higher sigma, it will also have a higher beta
