Company X Has a Beta of 1

question 22

Multiple Choice

Company X has a beta of 1.6, while Company Y's beta is 0.7. The risk-free rate is 7 percent, and the required rate of return on an average stock is 12 percent. 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 percent, 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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