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.

---

Definitions:

Paired-Difference T-Test

A statistical method used to compare two related or paired groups by analyzing the differences within each pair.

Wilcoxon Signed-Rank Test

A statistical test not based on parameter assumptions that is employed to evaluate two related samples, matched samples, or repeated observations within the same sample to determine if there is a difference in their population mean ranks.

Sample Sizes

Refers to the number of observations or data points collected in a sample from a population.

Normally Distributed

A probability distribution that is symmetric about the mean, showing that data near the mean are more frequent in occurrence than data far from the mean.