HR Corporation Has a Beta of 2

question 83

Multiple Choice

HR Corporation has a beta of 2.0,while LR Corporation's beta is 0.5.The risk-free rate is 10%,and the required rate of return on an average stock is 15%.Now the expected rate of inflation built into r_RF falls by 3 percentage points,the real risk-free rate remains constant,the required return on the market falls to 11%,and the betas remain constant.When all of these changes are made,what will be the difference in required returns on HR's and LR's stocks?

• A) 1.0%
• B) 2.5%
• C) 4.5%
• D) 5.4%
• E) 6.0%

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Definitions:

Consumer Economy

An economy driven by the spending of consumers on goods and services, indicative of a society valuing and depending upon consumption as a primary economic activity.

Population Increase

The growth in the number of people living in a particular area, region, or country, often measured by percentage change over time.

Hollywood Film Industry

A major sector of the U.S. entertainment industry, centered in Hollywood, California, known globally for producing a wide range of movies across various genres.

Chronic Unemployment

A prolonged situation where an individual remains unemployed for an extended period, often leading to significant personal and economic consequences.