Stock a Has a Beta of 0

question 125

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:

Cash Flow

The total amount of money being transferred into and out of a business, capturing the company's operational, investing, and financing activities.

Cost Of Capital

The minimum return rate a company needs to achieve on its investments to preserve its market valuation and draw in financing.

Cash Flow

The total sum of cash and cash-like assets moving in and out of a company.

NPV

Net Present Value, a method used in capital budgeting to evaluate the profitability of an investment or project by calculating the difference between the present value of cash inflows and outflows.