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 (r M r RF ) increase, the required returns of both stocks will increase by the same amount b 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 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 (r M r RF ) 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 (r M r RF ) increase, the required return on Stock HB will increase by more than that on Stock LB

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 returns  Which of the following statements is CORRECT  a  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  b  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  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 (r M r RF ) 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 (r M r RF ) increase, the required return on Stock HB will increase by more than that on Stock LB

Accepted Answer

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	a.	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.
	b.	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.
	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 (r_M r_RF) 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 (r_M r_RF) increase, the required return on Stock HB will increase by more than that on Stock LB.

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

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