Stock LB Has a Beta of 0

question 140

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 (r_M − r_RF) 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 (r_M − r_RF) 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 (r_M − r_RF) 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 (r_M − r_RF) declines, the required return of Stock LB will decline but the required return of Stock HB will increase.

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Definitions:

Skeletal Muscles

Muscular tissue attached to bones, primarily responsible for voluntary movements and maintaining posture.

Visceral Smooth Muscle

Visceral smooth muscle is the type of muscle found in the walls of internal organs, responsible for involuntary movements such as digestion and blood vessel constriction.

Amygdala

Nucleus in the temporal lobe of the brain, amygdaloid nucleus; also called amygdaloid nuclear complex.

Temporal Lobe

A region of the cerebral cortex located beneath the temples, involved in processing auditory information and encoding memory.