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.

Question

Quizplus · Accepted Answer

Beta measures a stock's volatility relative to the overall market. A higher beta (Stock Y) indicates more volatility and sensitivity to market movements, including changes in the market risk premium. If the market risk premium declines, both stocks' required returns decrease, but the decrease is more significant for Stock Y due to its higher beta.

Stock X Has a Beta of 0