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.

---

Definitions:

Large Arteries

Blood vessels that carry oxygen-rich blood away from the heart to various parts of the body, characterized by their large diameter and elastic walls.

Connective Tissue

A type of biological tissue that supports, protects, and binds other tissues in the body.

Familial Capital

The resources, knowledge, and skills passed down within families that can influence an individual's life chances and educational outcomes.

Aspirational Capital

The ability to maintain hopes and dreams for the future, even in the face of real and perceived barriers.