Stock a Has a Beta of 1

question 24

Multiple Choice

Stock A has a beta of 1.2 and a standard deviation of returns of 18%.Stock B has a beta of 1.8 and a standard deviation of returns of 18%.If the market risk premium increases,then

• A) the required return on stock B will increase more than the required return on stock A.
• B) the required returns on stocks A and B will both increase by the same amount.
• C) the required returns on stocks A and B will remain the same.
• D) the required return on stock A will increase more than the required return on stock B.

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Definitions:

Interest Paid

The amount paid by a borrower to a lender for the privilege of using borrowed money, typically expressed as an annual percentage of the loan outstanding.

Bond Discount

The gap between the nominal value of a bond and the price it fetches on the market when it is sold for an amount lower than its nominal value.

Straight-Line Amortization

A method of systematically reducing the cost value of an intangible asset over its useful life by charging equal expense amounts to each accounting period.

Effective-Interest Method

A method of calculating the interest expense on a bond or loan by applying the constant interest rate to the outstanding balance of the debt for each period.