Stock HB Has a Beta of 1

question 126

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 (rM − rRF) 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 (rM − rRF) 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 (rM − rRF) 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.

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Definitions:

Sensation

The initial detection of stimulus energy (e.g., sound, light) by sensory organs and its conversion into neural signals.

Efferent Nervous System

Part of the nervous system responsible for carrying motor signals from the central nervous system to the body, controlling actions.

External Stimulation

External stimulation refers to any input from the environment that influences sensory receptors and can alter an individual's response or behavior.

Persistence of Vision

is the phenomenon where an image continues to appear in one's vision after the exposure to the original image has ceased.