Company X Has Beta = 1

question 53

Multiple Choice

Company X has beta = 1.6, while Company Y's beta = 0.7.The risk-free rate is 7%, and the required rate of return on an average stock is 12%.Now the expected rate of inflation built into rRF rises by 1 percentage point, the real risk-free rate remains constant, the required return on the market rises to 14%, and betas remain constant.After all of these changes have been reflected in the data, by how much will the required return on Stock X exceed that on Stock Y?

• A)3.75%
• B)4.20%
• C)4.82%
• D)5.40%
• E)5.75%

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