Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50%...
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 − rRF) were to increase but the risk-free rate (r RF) remained constant, which of the following would occur?
| a. |
The required return would increase for Stock B but decrease for Stock A. |
|
| b. |
The required return would increase for Stock A but decrease for Stock B. |
|
| c. |
The required return would decrease by the same amount for both Stock A and Stock B. |
|
| d. |
The required return on Portfolio P would remain unchanged. |
|
| e. |
The required return would increase for both stocks but the increase would be greater for Stock B than for Stock A. |
Homework Answers
The following would happen:-
E) the required return would increase for both stocks but the increase would be greater for Stock B than for Stock A.
As the formula for CAPM is Rf+beta*risk premium, any increase in premium will first be multiplied by beta then be added to risk free rate, so both the stocks will increase but the incremental increase would depend on their respective beta's
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