Stock a Has a Beta of 0

question 126

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 (i.e. ,the correlation coefficients all equal zero) .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:

Series Path

A series path refers to an electrical circuit configuration where components are arranged in a sequence, one after another, allowing current to flow through one component to the next.

Parallel Path

A concept in electronics and computing where multiple pathways allow for concurrent processing or transmission of signals or data, enhancing speed and efficiency.

Input Instructions

In a programming context, these are commands or codes used to specify the type of data being introduced into a system or to control how an input device should provide data.

Input Modules

Input Modules are devices or circuits that accept data or signals from user interfaces or sensors to be processed by a control system.