Stock A has a beta of 1.2 and a standard deviation of returns of 14%. Stock B ha

Question

Stock A has a beta of 1.2 and a standard deviation of returns of 14%. Stock B has a beta of 1.8 and a standard deviation of returns of 18%. If the risk free rate of return increases and the market risk premium remains constant, then _________
a. The required rate of return on Stock B will increase more than the required rate of return on stock A.
b. The required returns on stocks A and B will both increase by the same amount.
c. The required returns on stocks A and B will remain the same
d. The required return on stock A will increase more than the required return on Stock B.

Explanation / Answer

Since Beta of Stock A is less, Therefore, The required return on stock A will increase more than the required return on Stock B.

Hence Answer is D.

As per Capital asset pricing model Expected return = Risk Free Return + Beta ( Market Premium - Risk Free Retrun )

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