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HR Corporation has a beta of 2.0, while LR Corporation's beta is 0.5. The risk-free rate is 10%, and the required rate of return on

HR Corporation has a beta of 2.0, while LR Corporation's beta is 0.5. The risk-free rate is 10%, and the required rate of return on an average stock is 15%. Now the expected rate of inflation built into rRF falls by 3 percentage points, the real risk-free rate remains constant, the required return on the market falls to 11%, and the betas remain constant. When all of these changes are made, what will be the difference in required returns on HR's and LR's stocks?

a.

2.5%

b.

1.0%

c.

4.5%

d.

6.0%

e.

5.4%

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