HR Corporation Has a Beta of 2

question 69

Multiple Choice

HR Corporation has a beta of 2.0, while LR Corporation's beta is 0.5. The risk-free rate is 10 percent, and the required rate of return on an average stock is 15 percent. Now the expected rate of inflation built into rRF falls by 3 percentage points, the real risk-free rate remains constant, the required return on the market falls to 11 percent, and the betas remain constant. When all of these changes are made, what will be the difference in the required returns on HR's and LR's stocks?

• A) 1.0%
• B) 2.5%
• C) 4.5%
• D) 5.4%
• E) 6.0%

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