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.

Question

Quizplus · Accepted Answer

Beta measures a stock's volatility relative to the overall market. A higher beta indicates greater volatility and, consequently, a higher required return for taking on more risk. If investors become more risk-averse, they will require a higher return for holding riskier assets. Since Stock B has a higher beta (1.6) compared to Stock A (0.8), its required return will increase more significantly than Stock A's as investors demand more compensation for the additional risk.

Stock a Has a Beta = 0