Stock a Has a Beta of 0

question 36

Multiple Choice

Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50% of Portfolio P is invested in Stock A and 50% is invested in Stock B. If the market risk premium (rM -rRF) were to increase but the risk-free rate (rRF) remained constant, which of the following would occur?

• A) the required return would decrease by the same amount for both stock a and stock b.
• B) the required return would increase for stock a but decrease for stock b.
• C) the required return on portfolio p would remain unchanged.
• D) the required return would increase for stock b but decrease for stock a.
• E) the required return would increase for both stocks but the increase would be greater for stock b than for stock a.

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Definitions:

Rationality

The characteristic of adhering to or being aligned with logic or reasoning.

Logical Thinking

The process of using reasoning consistently to come to a conclusion, problem solving and decision making based on a set of given rules.

Reasoning

The process of thinking about something in a logical way in order to form a conclusion or judgment.

Ego

In psychoanalytic theory, the part of the psyche that mediates between the instinctual desires of the id, the moral and social demands of the superego, and reality.