Stock LB Has a Beta of 0

question 96

Multiple Choice

Stock LB has a beta of 0.5 and Stock HB has a beta of 1.5. The market is in equilibrium, with required returns equaling expected returns. Which of the following statements is CORRECT?

• A) if both expected inflation and the market risk premium (rm - rrf) increase, the required return on stock hb will increase by more than that on stock lb.
• B) if both expected inflation and the market risk premium (rm - rrf) increase, the required returns of both stocks will increase by the same amount.
• C) since the market is in equilibrium, the required returns of the two stocks should be the same.
• D) if expected inflation remains constant but the market risk premium (rm- rrf) declines, the required return of stock hb will decline but the required return of stock lb will increase.
• E) if expected inflation remains constant but the market risk premium (rm - rrf) declines, the required return of stock lb will decline but the required return of stock hb will increase.

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