Question 1

Which of the following statements is CORRECT?
A)Lower beta stocks have higher required returns.
B)A stock's beta indicates its diversifiable risk.
C)Diversifiable risk cannot be completely diversified away.
D)Two securities with the same stand-alone risk must have the same betas.
E)The slope of the security market line is equal to the market risk premium.

Accepted Answer

The slope of the security market line (SML) represents the market risk premium, which is the additional return investors expect for taking on higher risk associated with investing in the stock market over a risk-free asset. This is a fundamental concept in the Capital Asset Pricing Model (CAPM), which describes the relationship between systematic risk and expected return for assets, particularly stocks.

Question 2

Which of the following statements is CORRECT? A)If the risk-free rate rises, then the market risk premium must also rise. B)If a company's beta is halved, then its required return will also be halved. C)If a company's beta doubles, then its required return will also double. D)The slope of the security market line is equal to the market risk premium, (r_M − r_RF). E)Beta is measured by the slope of the security market line.

Accepted Answer

The slope of the security market line (SML) represents the market risk premium, which is the difference between the expected return on the market portfolio and the risk-free rate. This is a fundamental concept in the Capital Asset Pricing Model (CAPM), where the slope of the SML is indeed the market risk premium, indicating how much additional return is expected for taking on additional risk.

Question 3

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium,r_M − r_RF,is positive.Which of the following statements is CORRECT? A)Stock B's required rate of return is twice that of Stock A. B)If Stock A's required return is 11%, then the market risk premium is 5%. C)If Stock B's required return is 11%, then the market risk premium is 5%. D)If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's. E)If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's.

Accepted Answer

The answer of The risk-free rate is 6%; Stock A...

Question 4

You have a portfolio P that consists of 50% Stock X and 50% Stock Y.Stock X has a beta of 0.7 and Stock Y has a beta of 1.3.The standard deviation of each stock's returns is 20%.The stocks' returns are independent of each other,i.e.,the correlation coefficient,r,between them is zero.Given this information,which of the following statements is CORRECT? A)The required return on Portfolio P is equal to the market risk premium (r_M − r_RF). B)Portfolio P has a beta of 0.7. C)Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, r_RF. D)Portfolio P has the same required return as the market (r_M). E)Portfolio P has a standard deviation of 20%.

Accepted Answer

The beta of Portfolio P is the weighted average of the betas of Stock X and Stock Y. Since Stock X has a beta of 0.7 and Stock Y has a beta of 1.3, and each stock makes up 50% of the portfolio, the portfolio's beta is (0.7*0.5 + 1.3*0.5) = 1.0. A beta of 1.0 indicates that the portfolio has the same systematic risk as the market, thus its required return is equal to the market's required return.

Question 5

Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information,which of the following statements is CORRECT?
A)If a stock has a negative beta, its required return must also be negative.
B)An index fund with beta = 1.0 should have a required return less than 11%.
C)If a stock's beta doubles, its required return must also double.
D)An index fund with beta = 1.0 should have a required return greater than 11%.
E)An index fund with beta = 1.0 should have a required return of 11%.

Accepted Answer

An index fund with a beta of 1.0 should have a required return equal to the sum of the risk-free rate and the market risk premium, which is 6% + 5% = 11%. Therefore, option E is correct. Option A is incorrect because a negative beta does not necessarily mean that the stock's required return is negative. Option B is incorrect because an index fund with a beta equal to 1.0 should have a required return equal to the market return, which is the sum of the risk-free rate and the market risk premium. Option C is incorrect because there is no direct relationship between a stock's beta and its required return.

Question 6

Which of the following statements is CORRECT?
A)Other things held constant, if investors suddenly become convinced that there will be deflation in the economy, then the required returns on all stocks should increase.
B)If a company's beta were cut in half, then its required rate of return would also be halved.
C)If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rates of return on stocks with betas less than 1.0 will decline while returns on stocks with betas above 1.0 will increase.
D)If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rate of return on an average stock will remain unchanged, but required returns on stocks with betas less than 1.0 will rise.
E)If a company's beta doubles, then its required rate of return will also double.

Accepted Answer

According to the Capital Asset Pricing Model (CAPM), the required rate of return on an average stock is equal to the risk-free rate plus the market risk premium multiplied by the stock's beta. Therefore, if the risk-free rate increases but the market risk premium decreases by the same amount, the impact on the overall required rate of return on an average stock will be neutral. However, stocks with betas less than 1.0 are less risky than the overall market and their required returns will increase, while stocks with betas greater than 1.0 are more risky than the overall market and their required returns will decrease.

Question 7

Stock X has a beta of 0.6,while Stock Y has a beta of 1.4.Which of the following statements is CORRECT?
A)Stock Y must have a higher expected return and a higher standard deviation than Stock X.
B)If expected inflation increases but the market risk premium is unchanged, then the required return on both stocks will fall by the same amount.
C)If the market risk premium declines but expected inflation is unchanged, the required return on both stocks will decrease, but the decrease will be greater for Stock Y.
D)If expected inflation declines but the market risk premium is unchanged, then the required return on both stocks will decrease but the decrease will be greater for Stock Y.
E)A portfolio consisting of $50,000 invested in Stock X and $50,000 invested in Stock Y will have a required return that exceeds that of the overall market.

Accepted Answer

C) is correct because the required return on a stock, according to the Capital Asset Pricing Model (CAPM), is determined by the risk-free rate plus the product of the stock's beta and the market risk premium. A decline in the market risk premium, with the risk-free rate (which is influenced by expected inflation) unchanged, would lead to a decrease in the required return for both stocks. However, since Stock Y has a higher beta (1.4) compared to Stock X (0.6), the decrease in required return will be more significant for Stock Y, reflecting its higher sensitivity to market movements.

Question 8

In historical data,we see that investments with the highest average annual returns also tend to have the highest standard deviations of annual returns.This observation supports the notion that there is a positive correlation between risk and return.Which of the following answers correctly ranks investments from highest to lowest risk (and return),where the security with the highest risk is shown first,the one with the lowest risk last?
A)Large-company stocks, small-company stocks, long-term corporate bonds, U.S. Treasury bills, long-term government bonds.
B)Small-company stocks, large-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills.
C)U.S. Treasury bills, long-term government bonds, long-term corporate bonds, small-company stocks, large-company stocks.
D)Large-company stocks, small-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills.
E)Small-company stocks, long-term corporate bonds, large-company stocks, long-term government bonds, U.S. Treasury bills.

Accepted Answer

Historically, small-company stocks have shown higher returns but also higher risk compared to large-company stocks. Long-term corporate bonds generally exhibit more risk and potentially higher returns than long-term government bonds and U.S. Treasury bills, which are considered the safest investment with the lowest returns. This ranking reflects the positive correlation between risk and return.

Question 9

Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?
A)If a stock's beta doubled, its required return under the CAPM would also double.
B)If a stock's beta doubled, its required return under the CAPM would more than double.
C)If a stock's beta were 1.0, its required return under the CAPM would be 5%.
D)If a stock's beta were less than 1.0, its required return under the CAPM would be less than 5%.
E)If a stock has a negative beta, its required return under the CAPM would be less than 5%.

Accepted Answer

The Capital Asset Pricing Model (CAPM) formula is $R_i = R_f + \beta_i(E[R_m] - R_f)$, where $R_i$ is the expected return of the investment, $R_f$ is the risk-free rate, $\beta_i$ is the beta of the investment, and $E[R_m]$ is the expected return of the market. A negative beta implies that the investment moves in the opposite direction of the market. Therefore, if a stock has a negative beta, its required return under the CAPM would indeed be less than the risk-free rate of 5%, assuming the expected market return is greater than the risk-free rate.

Question 10

Assume that in recent years both expected inflation and the market risk premium (r_M − r_RF)have declined.Assume also that all stocks have positive betas.Which of the following would be most likely to have occurred as a result of these changes? A)The required returns on all stocks have fallen, but the fall has been greater for stocks with higher betas. B)The average required return on the market, r_M, has remained constant, but the required returns have fallen for stocks that have betas greater than 1.0. C)Required returns have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0. D)The required returns on all stocks have fallen by the same amount. E)The required returns on all stocks have fallen, but the decline has been greater for stocks with lower betas.

Accepted Answer

When the market risk premium declines, the required return on all stocks will decrease, as they are all assumed to have positive betas. However, the required return will fall by a greater amount for stocks with higher betas, as they are more sensitive to changes in the market risk premium. Therefore, choice A is the most likely outcome. Choice B is incorrect because if the market risk premium has declined, it is unlikely that the average required return on the market would remain constant. Choice C is incorrect because it suggests that required returns have increased for some stocks, which is contrary to the premise of the question. Choice D is incorrect because the required return on higher-beta stocks will fall by a greater amount than the required return on lower-beta stocks. Choice E is also incorrect because the decline in required returns will be greater for higher-beta stocks.

Question 11

Dixon Food's stock has a beta of 1.4,while Clark Café's stock has a beta of 0.7.Assume that the risk-free rate,r_RF,is 5.5% and the market risk premium, (r_M − r_RF),equals 4%.Which of the following statements is CORRECT? A)If the market risk premium increases but the risk-free rate remains unchanged, Dixon's required return will increase because it has a beta greater than 1.0 but Clark's required return will decline because it has a beta less than 1.0. B)Since Dixon's beta is twice that of Clark's, its required rate of return will also be twice that of Clark's. C)If the risk-free rate increases while the market risk premium remains constant, then the required return on an average stock will increase. D)If the market risk premium decreases but the risk-free rate remains unchanged, Dixon's required return will decrease because it has a beta greater than 1.0 and Clark's will also decrease, but by more than Dixon's because it has a beta less than 1.0. E)If the risk-free rate increases but the market risk premium remains unchanged, the required return will increase for both stocks but the increase will be larger for Dixon since it has a higher beta.

Accepted Answer

The answer of Dixon Food's stock has a beta of...

Question 12

Stock LB has a beta of 0.5 and Stock HB has a beta of 1.5.The market is in equilibrium,with required returns equaling expected returns.Which of the following statements is CORRECT? A)If both expected inflation and the market risk premium (r_M − r_RF) increase, the required return on Stock HB will increase by more than that on Stock LB. B)If both expected inflation and the market risk premium (r_M − r_RF) increase, the required returns of both stocks will increase by the same amount. C)Since the market is in equilibrium, the required returns of the two stocks should be the same. D)If expected inflation remains constant but the market risk premium (r_M − r_RF) declines, the required return of Stock HB will decline but the required return of Stock LB will increase. E)If expected inflation remains constant but the market risk premium (r_M − r_RF) declines, the required return of Stock LB will decline but the required return of Stock HB will increase.

Accepted Answer

As per the Capital Asset Pricing Model (CAPM), the required return on a stock is equal to the risk-free rate plus the product of the market risk premium and the stock's beta. Since Stock HB has a higher beta than Stock LB, it is more sensitive to changes in the market risk premium. Therefore, if both expected inflation and the market risk premium increase, the required return on Stock HB will increase by more than that on Stock LB.

Question 13

Stock A has a beta of 0.7,whereas Stock B has a beta of 1.3.Portfolio P has 50% invested in both A and B.Which of the following would occur if the market risk premium increased by 1% but the risk-free rate remained constant?
A)The required return on both stocks would increase by 1%.
B)The required return on Portfolio P would remain unchanged.
C)The required return on Stock A would increase by more than 1%, while the return on Stock B would increase by less than 1%.
D)The required return for Stock A would fall, but the required return for Stock B would increase.
E)The required return on Portfolio P would increase by 1%.

Accepted Answer

The required return on a stock or portfolio is determined by the Capital Asset Pricing Model (CAPM), which is given by the formula: Required Return = Risk-Free Rate + Beta * (Market Risk Premium). Since both stocks A and B have positive betas, an increase in the market risk premium would increase the required return on both stocks. Given that Portfolio P is equally invested in both stocks, the overall effect on Portfolio P would be an average of the effects on Stocks A and B, leading to an increase in the required return on Portfolio P by the same percentage as the increase in the market risk premium.

Question 14

Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock B.Stock A has a beta of 1.2 and a standard deviation of 20%.Stock B has a beta of 0.8 and a standard deviation of 25%.Which of the following statements is CORRECT? (Assume that the stocks are in equilibrium.)
A)Stock B has a higher required rate of return than Stock A.
B)Portfolio P has a standard deviation of 22.5%.
C)More information is needed to determine the portfolio's beta.
D)Portfolio P has a beta of 1.0.
E)Stock A's returns are less highly correlated with the returns on most other stocks than are B's returns.

Accepted Answer

Portfolio P has a beta of 1.0 because the beta of the portfolio is the weighted average of the betas of the stocks in the portfolio. With equal investments in Stock A (beta = 1.2) and Stock B (beta = 0.8), the portfolio's beta is (1.2 + 0.8) / 2 = 1.0.

Question 15

Which of the following statements is CORRECT?
A)The SML shows the relationship between companies' required returns and their diversifiable risks. The slope and intercept of this line cannot be influenced by a firm's managers, but the position of the company on the line can be influenced by its managers.
B)Suppose you plotted the returns of a given stock against those of the market, and you found that the slope of the regression line was negative. The CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming investors expect the observed relationship to continue on into the future.
C)If investors become less risk averse, the slope of the Security Market Line will increase.
D)If a company increases its use of debt, this is likely to cause the slope of its SML to increase, indicating a higher required return on the stock.
E)The slope of the SML is determined by the value of beta.

Accepted Answer

The answer of Which of the following statements is CORRECT?
A)The...

Question 16

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)
A)The effect of a change in the market risk premium depends on the slope of the yield curve.
B)If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.
C)If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.
D)The effect of a change in the market risk premium depends on the level of the risk-free rate.
E)If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.

Accepted Answer

According to the Capital Asset Pricing Model (CAPM), the required return of a stock is equal to the risk-free rate plus the product of the market risk premium and the stock's beta. Therefore, if the market risk premium (the difference between the expected return on the market and the risk-free rate) increases by 1%, the required return will also increase by 1% for a stock that has a beta of 1.0. The other statements are not necessarily true; the effect of a change in the market risk premium depends on several factors and cannot be determined solely by the slope of the yield curve or the level of the risk-free rate, and the effect on the required return of stocks with different betas will vary.

Question 17

Assume that the risk-free rate remains constant,but the market risk premium declines.Which of the following is most likely to occur?
A)The required return on a stock with beta > 1.0 will increase.
B)The return on "the market" will remain constant.
C)The return on "the market" will increase.
D)The required return on a stock with beta < 1.0 will decline.
E)The required return on a stock with beta = 1.0 will not change.

Accepted Answer

When the market risk premium declines, the required return on stocks will also decline. This is because the required return is calculated as the risk-free rate plus the beta of the stock times the market risk premium. If the market risk premium decreases, the product of beta times the market risk premium also decreases, leading to a lower required return. This effect is more pronounced for stocks with a beta less than 1.0, as they are less sensitive to market movements.

Question 18

Suppose that during the coming year,the risk free rate,r_RF,is expected to remain the same,while the market risk premium (r_M − r_RF),is expected to fall.Given this forecast,which of the following statements is CORRECT? A)The required return on all stocks will remain unchanged. B)The required return will fall for all stocks, but it will fall more for stocks with higher betas. C)The required return for all stocks will fall by the same amount. D)The required return will fall for all stocks, but it will fall less for stocks with higher betas. E)The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0.

Accepted Answer

The required return on stocks is determined by the Capital Asset Pricing Model (CAPM), which states that the expected return on a stock equals the risk-free rate plus the stock's beta times the market risk premium. If the market risk premium falls and the risk-free rate remains the same, the required return on all stocks will fall. However, because the decrease is multiplied by the stock's beta, stocks with higher betas will see a larger decrease in their required returns.

Question 19

Portfolio P has equal amounts invested in each of the three stocks,A,B,and C.Stock A has a beta of 0.8,Stock B has a beta of 1.0,and Stock C has a beta of 1.2.Each of the stocks has a standard deviation of 25%.The returns on the three stocks are independent of one another (i.e.,the correlation coefficients all equal zero).Assume that there is an increase in the market risk premium,but the risk-free rate remains unchanged.Which of the following statements is CORRECT?
A)The required return on Stock A will increase by less than the increase in the market risk premium, while the required return on Stock C will increase by more than the increase in the market risk premium.
B)The required return on the average stock will remain unchanged, but the returns of riskier stocks (such as Stock C) will increase while the returns of safer stocks (such as Stock A) will decrease.
C)The required returns on all three stocks will increase by the amount of the increase in the market risk premium.
D)The required return on the average stock will remain unchanged, but the returns on riskier stocks (such as Stock C) will decrease while the returns on safer stocks (such as Stock A) will increase.
E)The required return of all stocks will remain unchanged since there was no change in their betas.

Accepted Answer

The required return on a stock is calculated using the Capital Asset Pricing Model (CAPM), which factors in the stock's beta, the market risk premium, and the risk-free rate. An increase in the market risk premium will cause an increase in the required return for all stocks. However, stocks with higher betas (such as Stock C) will increase by more than the increase in the market risk premium, while stocks with lower betas (such as Stock A) will increase by less than the increase in the market risk premium. Therefore, choice A is correct. Choices B, C, D, and E are all incorrect.

Question 20

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.

Accepted Answer

The required return on a stock is calculated using the Capital Asset Pricing Model (CAPM), which is: Required Return = Risk-Free Rate + Beta * (Market Risk Premium). Since the market risk premium increases and the risk-free rate remains constant, the required return for both stocks would increase. However, because Stock B has a higher beta (1.2) compared to Stock A (0.8), the increase in required return for Stock B would be greater than that for Stock A, reflecting its higher sensitivity to market movements.

Quiz 2: Risk and Return: Part I

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium,r_M − r_RF,is positive.Which of the following statements is CORRECT?

Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information,which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Stock X has a beta of 0.6,while Stock Y has a beta of 1.4.Which of the following statements is CORRECT?

Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

Assume that in recent years both expected inflation and the market risk premium (r_M − r_RF) have declined.Assume also that all stocks have positive betas.Which of the following would be most likely to have occurred as a result of these changes?

Dixon Food's stock has a beta of 1.4,while Clark Café's stock has a beta of 0.7.Assume that the risk-free rate,r_RF,is 5.5% and the market risk premium, (r_M − r_RF) ,equals 4%.Which of the following statements is CORRECT?

Stock LB has a beta of 0.5 and Stock HB has a beta of 1.5.The market is in equilibrium,with required returns equaling expected returns.Which of the following statements is CORRECT?

Stock A has a beta of 0.7,whereas Stock B has a beta of 1.3.Portfolio P has 50% invested in both A and B.Which of the following would occur if the market risk premium increased by 1% but the risk-free rate remained constant?

Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock B.Stock A has a beta of 1.2 and a standard deviation of 20%.Stock B has a beta of 0.8 and a standard deviation of 25%.Which of the following statements is CORRECT? (Assume that the stocks are in equilibrium.)

Which of the following statements is CORRECT?

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

Assume that the risk-free rate remains constant,but the market risk premium declines.Which of the following is most likely to occur?

Suppose that during the coming year,the risk free rate,r_RF,is expected to remain the same,while the market risk premium (r_M − r_RF) ,is expected to fall.Given this forecast,which of the following statements is CORRECT?

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?

Quiz 2: Risk and Return: Part I

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium,rM − rRF,is positive.Which of the following statements is CORRECT?

Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information,which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Stock X has a beta of 0.6,while Stock Y has a beta of 1.4.Which of the following statements is CORRECT?

Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

Assume that in recent years both expected inflation and the market risk premium (rM − rRF) have declined.Assume also that all stocks have positive betas.Which of the following would be most likely to have occurred as a result of these changes?

Dixon Food's stock has a beta of 1.4,while Clark Café's stock has a beta of 0.7.Assume that the risk-free rate,rRF,is 5.5% and the market risk premium, (rM − rRF) ,equals 4%.Which of the following statements is CORRECT?

Stock LB has a beta of 0.5 and Stock HB has a beta of 1.5.The market is in equilibrium,with required returns equaling expected returns.Which of the following statements is CORRECT?

Stock A has a beta of 0.7,whereas Stock B has a beta of 1.3.Portfolio P has 50% invested in both A and B.Which of the following would occur if the market risk premium increased by 1% but the risk-free rate remained constant?

Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock B.Stock A has a beta of 1.2 and a standard deviation of 20%.Stock B has a beta of 0.8 and a standard deviation of 25%.Which of the following statements is CORRECT? (Assume that the stocks are in equilibrium.)

Which of the following statements is CORRECT?

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

Assume that the risk-free rate remains constant,but the market risk premium declines.Which of the following is most likely to occur?

Suppose that during the coming year,the risk free rate,rRF,is expected to remain the same,while the market risk premium (rM − rRF) ,is expected to fall.Given this forecast,which of the following statements is CORRECT?

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 (rM − rRF) were to increase but the risk-free rate (rRF) remained constant,which of the following would occur?

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium,r_M − r_RF,is positive.Which of the following statements is CORRECT?

Assume that in recent years both expected inflation and the market risk premium (r_M − r_RF) have declined.Assume also that all stocks have positive betas.Which of the following would be most likely to have occurred as a result of these changes?

Dixon Food's stock has a beta of 1.4,while Clark Café's stock has a beta of 0.7.Assume that the risk-free rate,r_RF,is 5.5% and the market risk premium, (r_M − r_RF) ,equals 4%.Which of the following statements is CORRECT?

Suppose that during the coming year,the risk free rate,r_RF,is expected to remain the same,while the market risk premium (r_M − r_RF) ,is expected to fall.Given this forecast,which of the following statements is CORRECT?

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?