Stock A has a beta = 0.8,while Stock B has a beta = 1.6.Which of the following statements is CORRECT?
A) Stock B's required return is double that of Stock A's.
B) If the marginal investor becomes more risk averse,the required return on Stock B will increase by more than the required return on Stock A.
C) An equally weighted portfolio of Stocks A and B will have a beta lower than 1.2.
D) If the marginal investor becomes more risk averse,the required return on Stock A will increase by more than the required return on Stock B.
E) If the risk-free rate increases but the market risk premium remains constant,the required return on Stock A will increase by more than that on Stock B.

Question

Quizplus · Accepted Answer

Beta measures a stock's volatility in relation to the market. A higher beta (Stock B, 1.6) indicates greater volatility and thus a higher risk, leading to a higher required return compared to a stock with a lower beta (Stock A, 0.8). If investors become more risk-averse, they will require a higher return for taking on additional risk, affecting Stock B more due to its higher beta.

Stock a Has a Beta = 0