Stock LB Has a Beta of 0

question 104

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 (rM - rRF)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 (rM - rRF)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 (rM - rRF)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 (rM - rRF)declines, the required return of Stock LB will decline but the required return of Stock HB will increase.

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Definitions:

Carbon Dioxide

A colorless, odorless gas produced by burning carbon and organic compounds and by respiration. It is naturally present in air and is absorbed by plants in photosynthesis.

Terrestrial Plants

Terrestrial plants are species that grow on land rather than in water, adapting to a variety of habitats from forests to deserts.

Aquifer

Rock layers that contain water and release it in appreciable quantities to wells or springs.

Rate Of Recharge

The speed at which an aquifer or a rechargeable battery regains its capacity or is refilled after use.