Stock X has a beta of 0.5 and Stock Y has a beta of 1.5. Which of the following

Question

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?Answer If you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio would have a beta significantly lower than 1.0, provided the returns on the two stocks are not perfectly correlated. Stock Y's realized return during the coming year will be higher than Stock X's return. If the expected rate of inflation increases
but the market risk premium is unchanged, the required returns on the two stocks should increase by the same amount. Stock Y's return has a higher standard
deviation than Stock X. 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. If you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio would have a beta significantly lower than 1.0, provided the returns on the two stocks are not perfectly correlated. Stock Y's realized return during the coming year will be higher than Stock X's return. If the expected rate of inflation increases
but the market risk premium is unchanged, the required returns on the two stocks should increase by the same amount. Stock Y's return has a higher standard
deviation than Stock X. 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. If you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio would have a beta significantly lower than 1.0, provided the returns on the two stocks are not perfectly correlated. Stock Y's realized return during the coming year will be higher than Stock X's return. If the expected rate of inflation increases
but the market risk premium is unchanged, the required returns on the two stocks should increase by the same amount. Stock Y's return has a higher standard
deviation than Stock X. 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.

Explanation / Answer

If the expected rate of inflation increases
but the market risk premium is unchanged, the required returns on the two stocks should increase by the same amount.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.