Stock a Has a Beta of 0

question 122

Multiple Choice

Stock A has a beta of 0.7,whereas Stock B has a beta of 1.3.Portfolio P has 50% invested in both A and B.Which of the following would occur if the market risk premium increased by 1% but the risk-free rate remained constant?

• A) The required return on Portfolio P would increase by 1%.
• B) The required return on both stocks would increase by 1%.
• C) The required return on Portfolio P would remain unchanged.
• D) The required return on Stock A would increase by more than 1%,while the return on Stock B would increase by less than 1%.
• E) The required return for Stock A would fall,but the required return for Stock B would increase.

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Definitions:

Present Value

The worth at present of future monetary sums or cash flow streams, evaluated with a preset rate of return.

Cash Flows

The sum of funds flowing in and out of a company, particularly as it influences liquidity.

Capital Budgeting Project

A process of evaluating and selecting long-term investments that are expected to generate revenues or reduce costs, aiding in a firm's strategic planning.

Weighted Average Cost of Capital (WACC)

WACC is a calculation of a firm's cost of capital, where each category of capital (debt, equity) is proportionately weighted.