Stocks a and B Have the Following Data $\begin{array}{lcc}& \mathrm { A } & \mathrm { B } \\\text { Beta } & 1.10 & 0.90 \\\text { Constant growth rate } & 7.00 \% & 7.00 \%\end{array}$

question 40

Multiple Choice

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
$\begin{array}{lcc}& \mathrm { A } & \mathrm { B } \\\text { Beta } & 1.10 & 0.90 \\\text { Constant growth rate } & 7.00 \% & 7.00 \%\end{array}$

• A) stock a must have a higher dividend yield than stock b.
• B) stock b's dividend yield equals its expected dividend growth rate.
• C) stock b must have the higher required return.
• D) stock b could have the higher expected return.
• E) stock a must have a higher stock price than stock b.

---

Definitions:

Equilibrium

A state in an economic model where demand equals supply, meaning there is no incentive for change in the market situation.

Marginal Rates Of Transformation

The rate at which one good has to be sacrificed to produce an additional unit of another good, holding technology constant.

Marginal Rate Of Technical Substitution

The rate at which one input can be reduced for an additional unit of another input, while keeping the level of output constant.

Marginal Rate Of Substitution

The rate at which a consumer is willing to substitute one good for another, keeping utility constant, reflecting the trade-offs between goods.