Stock X Has a Beta of 0

question 99

Multiple Choice

Stock X has a beta of 0.5 and Stock Y has a beta of 1.5. Which of the following statements must be true, according to the CAPM?

• A) 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.
• B) Stock Y's realized return during the coming year will be higher than Stock X's return.
• C) 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.
• D) Stock Y's return has a higher standard deviation than Stock X.
• E) 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.

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Definitions:

Aggregate Demand

The grand sum of demands for all products and services within an economy, fixed at a standard price range during a certain time period.

Expected Inflation Rate

The expected inflation rate is the anticipated annual increase in the average price level of goods and services within an economy.

Actual Inflation Rate

The rate at which the general level of prices for goods and services is rising, and subsequently purchasing power is falling, measured over a particular period.

Short-run Phillips Curve

A graphical representation that shows the inverse relationship between the rate of inflation and the rate of unemployment in an economy over a short period.