Question
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
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 both expected inflation and the market risk premium (rM rRF) increase, the required returns of both stocks will increase by the same amount. |
| b. | If expected inflation remains constant but the market risk premium (rM rRF) declines, the required return of Stock HB will decline but the required return of Stock LB will increase. |
| c. | Since the market is in equilibrium, the required returns of the two stocks should be the same. |
| d. | If expected inflation remains constant but the market risk premium (rM rRF) declines, the required return of Stock LB will decline but the required return of Stock HB will increase. |
| e. | If both expected inflation and the market risk premium (rM rRF) increase, the required return on Stock HB will increase by more than that on Stock LB. |
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