Stock A has a beta = 0.8, while Stock B has a beta = 1.6.Which of the following statements is CORRECT?
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 beta coefficient measures a stock's volatility in relation to the overall market. A higher beta indicates greater volatility and, consequently, a higher risk premium required by investors. If investors become more risk-averse, they will demand a higher risk premium for holding riskier assets. Since Stock B has a higher beta (1.6) compared to Stock A (0.8), its required return will increase more significantly than that of Stock A in response to increased risk aversion.

Stock a Has a Beta = 0