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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Definitions:

Full-Cost Pricing

An economic concept that involves assigning prices to goods and services that fully reflect their true costs, including environmental and social impacts.

Government by the People

A form of democracy where the government is elected by the citizens, ensuring that the authority and sovereignty rest with the population.

Environmental Law

A collection of laws and regulations that govern how humans interact with the environment, aiming to protect natural resources and prevent pollution.

Social and Private Interests

Diverse motivations or goals held by society at large or by individuals, potentially leading to conflict or cooperation.