Stock HB Has a Beta of 1

question 36

Multiple Choice

Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5. The market is in equilibrium, with required returns equaling expected returns. Which of the following statements is CORRECT?

• A) If expected inflation remains constant but the market risk premium (rM − rRF) declines, the required return of Stock LB will decline but the required return of Stock HB will increase.
• B) If both expected inflation and the market risk premium (rM − rRF) increase, the required return on Stock HB will increase by more than that on Stock LB.
• C) If both expected inflation and the market risk premium (rM − rRF) increase, the required returns of both stocks will increase by the same amount.
• D) Since the market is in equilibrium, the required returns of the two stocks should be the same.
• E) If expected inflation remains constant but the market risk premium (rM − rRF) declines, the required return of Stock HB will decline but the required return of Stock LB will increase.

---

Definitions:

Group Reflection

The process by which a group collectively thinks about and discusses its past actions, decisions, and outcomes to learn and improve.

Deserve Punishment

The belief that individuals who have committed wrongdoing or broken rules should face consequences for their actions.

Consideration

The degree to which the leader creates an environment of emotional support, warmth, friendliness, and trust.

Marketing Campaigns

Structured sequences of activities and messages designed to promote a product, service, or brand to targeted audiences.