Stock Q Has a Beta (β)Equal to 1

question 41

Multiple Choice

Stock Q has a beta (β) equal to 1.6 and Stock P has a beta equal to 0.8.Based on this information,according to the capital asset pricing model (CAPM) ,which of the following statements is correct?

• A) The required rate of return for Stock Q, r_Q, should be 1.6 times greater than the required rate of return for Stock P, r_P.
• B) The risk premium associated with Stock Q, RP_Q, should be 1.6 times greater than the risk premium associated with Stock P, RP_P.
• C) The required rate of return for Stock Q, r_Q, should be two times greater than the required rate of return for Stock P, r_P.
• D) The risk premium associated with Stock Q, RP_Q, should be two times greater than the risk premium associated with Stock P, RP_P.
• E) None of the above is a correct answer.

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Definitions:

Non-Interventionists

Individuals or policies favoring minimal diplomatic and military involvement by a country in the affairs of other nations.

Monetarists

Economists who emphasize the role of governments in controlling the amount of money in circulation to regulate the economy and control inflation.

Classical Economic Theory

A school of thought in economics that emphasizes free markets, the importance of limited government intervention, and the role of supply and demand in an economy.

Expansionary Fiscal Policies

Government policies aimed at stimulating economic growth through increased public spending, tax cuts, or both, thereby increasing aggregate demand.