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%? (Assume that the risk-free rate remains constant.)
A)The required return on Portfolio P would increase by 1%.
B)The required return on both stocks would increase by 1%.
C)The required return on Portfolio P would remain unchanged.
D)The required return on Stock A would increase by more than 1%, while the return on Stock B would increase by less than 1%.

Question

Quizplus · Accepted Answer

The required return on Portfolio P is the weighted average of the required returns on Stock A and Stock B. Since Stock B has a higher beta, it is more sensitive to market movements and will have a higher required return. Thus, an increase in the market risk premium will have a greater impact on the required return for Stock B than Stock A, leading to an overall increase in the required return for Portfolio P. Therefore, the correct answer is A.

Stock a Has a Beta of 0