Portfolio P Has Equal Amounts Invested in Each of the Three

question 1

Multiple Choice

Portfolio P has equal amounts invested in each of the three stocks, A, B, and C. Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2. Each of the stocks has a standard deviation of 25%. The returns on the three stocks are independent of one another (i.e., the correlation coefficients all equal zero) . Assume that there is an increase in the market risk premium, but the risk-free rate remains unchanged. Which of the following statements is CORRECTσ

• A) the required return on stock a will increase by less than the increase in the market risk premium, while the required return on stock c will increase by more than the increase in the market risk premium.
• B) the required return on the average stock will remain unchanged, but the returns of riskier stocks (such as stock c) will increase while the returns of safer stocks (such as stock a) will decrease.
• C) the required returns on all three stocks will increase by the amount of the increase in the market risk premium.
• D) the required return on the average stock will remain unchanged, but the returns on riskier stocks (such as stock c) will decrease while the returns on safer stocks (such as stock a) will increase.
• E) the required return of all stocks will remain unchanged since there was no change in their betas.

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Definitions:

Tradable Emissions Permit

A market-based mechanism that provides economic incentives for achieving reductions in the emissions of pollutants, allowing companies to buy or sell emission rights.

Opportunity Cost

The importance of the next preferred option sacrificed by deciding on a course of action.

Sulfur Dioxide

A chemical compound with the formula SO2, commonly produced by volcanoes and industrial processes, known for its role in acid rain formation.

Environmental Standards

Rules and guidelines set by governments or international bodies to protect the environment from harmful industrial emissions and practices.