Stock a Has a Beta of 0

question 20

Multiple Choice

Stock A has a beta of 0.8,Stock B has a beta of 1.0,and Stock C has a beta of 1.2.Portfolio P has equal amounts invested in each of the three stocks.Each of the stocks has a standard deviation of 25%.The returns on the three stocks are independent of one another (i.e.,the correlation coefficients all equal zero) .Assume that there is an increase in the market risk premium,but the risk-free rate remains unchanged.Which of the following statements is correct?

• A)The required return of all stocks will remain unchanged since there was no change in their betas.
• B)The required return on Stock A will increase by less than the increase in the market risk premium, while the required return on Stock C will increase by more than the increase in the market risk premium.
• C)The required return on the average stock will remain unchanged, but the returns of riskier stocks (such as Stock C) will increase while the returns of safer stocks (such as Stock A) will decrease.
• D)The required return on the average stock will remain unchanged, but the returns of riskier stocks (such as Stock C) will decrease while the returns on safer stocks (such as Stock A) will increase.

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Definitions:

Social Class

refers to divisions in society based on economic, cultural, or social status which impact individuals' opportunities, lifestyles, and attitudes.

Economic Decline

A period where an economy experiences a decrease in its overall output or economic activity.

Middle-Class

A socioeconomic group that falls between the working class and the upper class, typically characterized by moderate income, education, and a certain level of economic security.

Social Mobility

The ability of individuals or families to move within or between social strata in a society, impacting their economic and social position.