Stock A has a beta of 0.8 and Stock B has a beta of 1.2.50% of Portfolio P is invested in Stock A and 50% is invested in Stock B.If the market risk premium (r_M − r_RF) were to increase but the risk-free rate (r_RF) remained constant, which of the following would occur? A) The required return would decrease by the same amount for both Stock A and Stock B. B) The required return would increase for Stock A but decrease for Stock B. C) The required return on Portfolio P would remain unchanged. D) The required return would increase for Stock B but decrease for Stock A. E) The required return would increase for both stocks but the increase would be greater for Stock B than for Stock A.

Question

Quizplus · Accepted Answer

The required return for both Stock A and Stock B would increase as a result of an increase in the market risk premium, since both stocks have betas greater than zero. However, since Stock B has a higher beta than Stock A, its required return would increase by a greater magnitude. Therefore, the required return would increase for both stocks but the increase would be greater for Stock B than for Stock A. This would also result in an increase in the required return for Portfolio P, since it is equally invested in both stocks.

Stock a Has a Beta of 0