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

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.

Quizplus · Accepted Answer

The required return on a stock is influenced by its beta. A higher beta means more sensitivity to changes in market risk. Therefore, if investors become more risk-averse, the required return on the higher beta stock (Stock B) will increase more than that on the lower beta stock (Stock A).

Stock a Has a Beta = 0