Stock X Has a Beta of 0

question 4

Multiple Choice

Stock X has a beta of 0.7 and Stock Y has a beta of 1.7.Which of the following statements must be true, according to the CAPM?

• A) Stock Y's realized return during the coming year will be higher than Stock X's return.
• B) If the expected rate of inflation increases but the market risk premium is unchanged, the required returns on the two stocks should increase by the same amount.
• C) Stock Y's return has a higher standard deviation than Stock X.
• D) If the market risk premium declines, but the risk-free rate is unchanged, Stock X will have a larger decline in its required return than will Stock Y.
• E) If you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio would have a beta significantly lower than 1.0, provided the returns on the two stocks are not perfectly correlated.

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Definitions:

Common Stock

Equity ownership shares in a corporation, giving holders voting rights and a claim on a portion of the company's profits via dividends.

Asset Securitizations

The financial process by which assets are pooled together and securities are issued representing an interest in these assets.

Investment Choices

The act of deciding where to put money to work in the financial or capital markets with the expectation of receiving a return.

Warrant

A warrant gives the holder the right, but not the obligation, to buy or sell a company's stock at a specific price before a certain date, often issued as part of a new stock or bond issue.