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 F-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 a stock is calculated as the risk-free rate plus the product of beta and the market risk premium. Since the risk-free rate is constant, an increase in market risk premium will lead to an increase in the required return for both Stock A and Stock B. However, the increase will be greater for Stock B since it has a higher beta (1.2) compared to Stock A (0.8). Therefore, the best choice is E.

Stock a Has a Beta of 0