Stock X Has a Beta of 0

question 17

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 CAPMσ

• 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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Definitions:

Cash Receipts Journal

A financial journal that records all cash inflows or receipts of a business, including sales cash and account receivables collections.

Incorrectly Recorded

Refers to an error in documenting financial or other records, leading to inaccuracies in the accounting or data management process.

Bank Reconciliation

The process of matching the balances in an entity's accounting records for a cash account to the corresponding information on a bank statement.

Company's Balance

The total net worth or financial position of a company at a specific point in time, often reflected in the balance sheet.