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 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

Stock B has a higher beta, which means it is more sensitive to market risk and requires a higher return to compensate for that risk. Therefore, 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. Choices A, C, and D are incorrect because they ignore the impact of beta on required return.

Stock a Has a Beta = 0