Stock LB Has a Beta of 0

question 24

Multiple Choice

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

• A) 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.
• B) If both expected inflation and the market risk premium (rM − rRF) increase, the required returns of both stocks will increase by the same amount.
• C) Since the market is in equilibrium, the required returns of the two stocks should be the same.
• D) 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.
• E) 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.

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Definitions:

Receiver

An individual or entity appointed by a court to manage the property, finances, or operations of a company or entity in distress.

Liquidate

The process of converting assets into cash or cash equivalents, often done in the context of winding up a business, paying off debts, or redistributing resources.

Conserve Assets

The practice of managing and protecting assets to ensure their longevity or to prevent loss.

Reorganization Cases

Legal cases that involve restructuring a company's debts and operations with the goal of returning to profitability and viability.