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Stock Beta and Required Return on Stock

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1) Stock a has a beta of 1.5 and Stock b 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. Since the market is in equilibrium, the required returns of the two stocks should be the same.
b. If expected inflation remains constant but the market risk premium (rM - rRF) declines, the required return on Stock HB will decline but the required return of Stock LB will increase.
c. 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.
d. If both expected inflation and the market risk premium (rM - rRF) increase, the required returns of both stocks will increase by the same amount.
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.

2) The risk-free rate is 5%. Stock A has a beta = 1.0 and Stock B has a beta = 1.4. Stock A has a required return of 11%. What is Stock B's required return?

a. 12.4%
b. 13.4%
c. 14.4%
d. 15.4%
e. 16.4%

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Solution Preview

1) Stock a has a beta of 1.5 and Stock b 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. Since the market is in equilibrium, the required returns of the two stocks should be the same.
b. If expected inflation remains constant but the market risk premium (rM - rRF) declines, the required return on Stock HB will decline but the required return of Stock LB will increase.
c. 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.
d. If both expected inflation and the market risk premium (rM - rRF) ...

Solution Summary

Answers 2 multiple choice questions on stock beta, required return on stock.

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