Stock X has a beta of 0.5 and Stock Y has a beta of 1.5.Which of the following statements must be true,according to the CAPM?
A)Stock Y's return during the coming year will be higher than Stock X's return.
B)If expected inflation increases but the market risk premium is unchanged, the required returns on the two stocks will increase by the same amount.
C)Stock Y's return has a higher standard deviation than Stock X.
D)If the market risk premium declines, but the risk-free rate is unchanged, Stock X will have a larger decline in its required return than will Stock Y.

Question

Quizplus · Accepted Answer

According to the CAPM, if expected inflation increases but the market risk premium remains unchanged, the required returns on both stocks will increase by the same amount, as both are affected equally by changes in the risk-free rate.

Stock X Has a Beta of 0