Stock LB Has a Beta of 0

question 140

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 (r_M − r_RF) 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 (r_M − r_RF) 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 (r_M − r_RF) 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 (r_M − r_RF) declines, the required return of Stock LB will decline but the required return of Stock HB will increase.

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