Stock A has a beta of 0.7,whereas Stock B has a beta of 1.3.Portfolio P has 50% invested in both A and B.Which of the following would occur if the market risk premium increased by 1% but the risk-free rate remained constant?
A) The required return on Portfolio P would increase by 1%.
B) The required return on both stocks would increase by 1%.
C) The required return on Portfolio P would remain unchanged.
D) The required return on Stock A would increase by more than 1%,while the return on Stock B would increase by less than 1%.
E) The required return for Stock A would fall,but the required return for Stock B would increase.

Question

Quizplus · Accepted Answer

The required return on Portfolio P is a weighted average of the required returns on Stocks A and B. Therefore, a change in the market risk premium would affect the required return on the portfolio. Since Stock A has a beta of 0.7, it is less sensitive to market changes than Stock B, which has a beta of 1.3. As a result, the required return on Stock A would increase by less than 1%, while the return on Stock B would increase by more than 1%. Since Portfolio P holds an equal amount of both stocks, the overall effect would be an increase in the required return of 1%.

Stock a Has a Beta of 0