Stock HB Has a Beta of 1

question 105

Multiple Choice

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

• A) 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.
• B) 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.
• C) 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.
• D) Since the market is in equilibrium,the required returns of the two stocks should be the same.
• E) 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.

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