Stock HB Has a Beta of 1

question 105

Multiple Choice

Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5.The market is in equilibrium,with required returns equaling expected returns.Which of the following statements is CORRECT?

• A) 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.
• B) 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.
• C) 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.
• D) Since the market is in equilibrium,the required returns of the two stocks should be the same.
• E) 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.

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Definitions:

External Adaptation

A pattern of basic assumptions shared between employees of the goals, tasks, and methods that need to be achieved, together with ways of managing success and failure.

Outside Influences

External factors or forces that can affect a person's decisions, behaviors, or outcomes, often beyond their immediate control.

External Adaptation

The process through which an organization or individual adjusts to changes in the external environment to survive and thrive.

Internal Integration

A shared identity with agreed-upon methods of working together.