A Canadian investment advisor is evaluating two exchange-traded funds (ETFs) for a client's growth-oriented portfolio. ETF A has a beta of 1.3 relative to the S&P/TSX Composite Index, while ETF B has a beta of 0.8. If the advisor expects the S&P/TSX Composite Index to increase by 10% in a bull market, what is the expected approximate return difference between ETF A and ETF B, assuming the risk-free rate is 2%?

Question: A Canadian investment advisor is evaluating two exchange-traded funds (ETFs) for a client's growth-oriented portfolio. ETF A has a beta of 1.3 relative to the S&P/TSX Composite Index, while ETF B has a beta of 0.8. If the advisor expects the S&P/TSX Composite Index to increase by 10% in a bull market, what is the expected approximate return difference between ETF A and ETF B, assuming the risk-free rate is 2%?

Answer options:

• ETF A is expected to return approximately 13%, and ETF B 8%.
• ETF A is expected to return approximately 15%, and ETF B 10%. ✅ ETF A is expected to return approximately 5% more than ETF B.
• ETF A is expected to return approximately 3% more than ETF B.

Correct answer: ETF A is expected to return approximately 5% more than ETF B.

Explanation: Beta measures systematic risk and how an asset's return moves relative to the market. If the market (S&P/TSX) increases by 10%, ETF A (beta 1.3) would be expected to return approximately 13% (1.3 * 10%), while ETF B (beta 0.8) would be expected to return approximately 8% (0.8 * 10%). The difference is approximately 5% (13% - 8%). The risk-free rate is not directly used for this comparative beta interpretation in this simplified scenario.