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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Definitions:

Technical Skills

Specific abilities and knowledge that are required to perform particular tasks, especially those involving methods, processes, or techniques.

Expert Learning

involves advanced or specialized knowledge acquisition, where individuals further their understanding in a particular field through concentrated study or practice.

Human Scaling

The process of designing environments, products, or systems to be physically and psychologically compatible with human body sizes, abilities, and limits.

Hindsight Bias

The tendency to believe, after an outcome is known, that one would have foreseen it, often referred to as the "I-knew-it-all-along" phenomenon.