Stock a Has a Beta = 0

question 126

Multiple Choice

Stock A has a beta = 0.8, while Stock B has a beta = 1.6.Which of the following statements is CORRECT?

• A) If the marginal investor becomes more risk averse, the required return on Stock B will increase by more than the required return on Stock A.
• B) An equally weighted portfolio of Stocks A and B will have a beta lower than 1.2.
• C) If the marginal investor becomes more risk averse, the required return on Stock A will increase by more than the required return on Stock B.
• D) If the risk-free rate increases but the market risk premium remains constant, the required return on Stock A will increase by more than that on Stock B.
• E) Stock B's required return is double that of Stock A's.

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Definitions:

Expectancy Model

A psychological theory stating that motivation is determined by an individual's expected outcomes or rewards following certain behaviors.

Second-level Outcome

The indirect or subsequent effects or results that follow the immediate consequences of an action or decision.

Equity Theory

A theory in social psychology that explains how individuals perceive fairness in distribution of resources and treatment in social exchanges.

Inputs

Resources, materials, or information that are provided to a process or system in order to achieve desired outputs or outcomes.