Stock HB Has a Beta of 1

question 43

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 equalling 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 of 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)If expected inflation remains constant but the market risk premium (r_M - r_RF) declines, the required return on Stock HB will decline but the required return of Stock LB will increase.

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