Stock HB Has a Beta of 1

question 53

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:

Maker

In finance, the party that creates or issues a promissory note.

Petty Cash Fund

A small amount of cash kept on hand for minor or incidental expenses.

Cash Over and Short

An account used in cash management to record discrepancies between actual cash received and expected amounts, indicating either excess cash or a shortage.

Miscellaneous Revenue

Miscellaneous Revenue represents income received by a business from sources not related to its primary operations, such as sales of assets, interest, or one-time events.