Stock A has a beta = 0.8, while Stock B has a beta = 1.6. Which of the following statements is CORRECTσ
A) 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.
B) an equally weighted portfolio of stocks a and b will have a beta lower than 1.2.
C) 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.
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.
E) stock b's required return is double that of stock a's.

Question

Quizplus · Accepted Answer

The required return on a stock is influenced by its beta, which measures its sensitivity to market risk. Stock B, with a higher beta, will see a larger increase in required return if investors become more risk-averse, as it is more sensitive to changes in market risk.

Stock a Has a Beta = 0