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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Definitions:

Semiskilled Labor

refers to work that requires some level of training or skills but is less complex and requires less education than skilled labor.

Supply Curves

Graphical representations showing the relationship between the price of a good and the quantity supplied.

Demand Curves

Demand curves graphically represent the relationship between the price of a good and the quantity demanded by consumers.

Minimum Wage

is the lowest legal salary that employers can pay workers, set by government law to protect workers from unduly low pay.