Stock a Has a Beta of 0

question 129

Multiple Choice

Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50% of Portfolio P is invested in Stock A and 50% is invested in Stock B. If the market risk premium (rM − rRF) were to increase but the risk-free rate (rRF) remained constant, which of the following would occur?

• A) The required return would increase for both stocks but the increase would be greater for Stock B than for Stock A.
• B) The required return would decrease by the same amount for both Stock A and Stock B.
• C) The required return would increase for Stock A but decrease for Stock B.
• D) The required return on Portfolio P would remain unchanged.
• E) The required return would increase for Stock B but decrease for Stock A.

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Definitions:

Ego

In psychoanalytic theory, the part of the personality that mediates between the demands of the id, the superego, and reality.

Id

In psychoanalytic theory, the part of the psyche that is the source of instinctual impulses and demands for immediate satisfaction of primitive needs.

Personality

The combination of emotional, attitudinal, and behavioral response patterns of an individual that are unique and relatively consistent over time and across situations.

Id

In psychoanalytic theory, the part of the mind in which innate instinctive impulses and primary processes are manifest.