Stock a Has a Beta of 0

question 53

Multiple Choice

Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2.Portfolio P has equal amounts invested in each of the three stocks.Each of the stocks has a standard deviation of 25%.The returns on the three stocks are independent of one another Assume that there is an increase in the market risk premium, but the risk-free rate remains unchanged.Which of the following statements is CORRECT?

• A)The required return of all stocks will remain unchanged since there was no change in their betas.
• B)The required return on Stock A will increase by less than the increase in the market risk premium, while the required return on Stock C will increase by more than the increase in the market risk premium.
• C)The required return on the average stock will remain unchanged, but the returns of riskier stocks (such as Stock C) will increase while the returns of safer stocks (such as Stock A) will decrease.
• D)The required returns on all three stocks will increase by the amount of the increase in the market risk premium.
• E)The required return on the average stock will remain unchanged, but the returns on riskier stocks (such as Stock C) will decrease while the returns on safer stocks (such as Stock A) will increase.

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Definitions:

Net Income

The amount of profit that remains after subtracting all the costs, taxes, and expenses from total revenue.

Capital Account Balance

The amount recorded in a company's capital account, representing the net worth or equity of the owners in the business.

Partnership Capital

The total amount invested by all partners in a partnership, representing their ownership interest.

Income-sharing Ratio

The pre-agreed proportion in which partners or stakeholders share the generated income or losses.