Stock X Has a Beta of 0

question 4

Multiple Choice

Stock X has a beta of 0.7 and Stock Y has a beta of 1.7.Which of the following statements must be true, according to the CAPM?

• A) Stock Y's realized return during the coming year will be higher than Stock X's return.
• B) If the expected rate of inflation increases but the market risk premium is unchanged, the required returns on the two stocks should increase by the same amount.
• C) Stock Y's return has a higher standard deviation than Stock X.
• D) If the market risk premium declines, but the risk-free rate is unchanged, Stock X will have a larger decline in its required return than will Stock Y.
• E) If you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio would have a beta significantly lower than 1.0, provided the returns on the two stocks are not perfectly correlated.

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