Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50% of Portfolio P is i

Question

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 (rM RF) were to increase but the risk-free rate (rRF) remained constant, which of the following would occur? O a. The required return would increase for Stock B but decrease for Stock A b. The required return on Portfolio P would remain unchanged. O c. The required return would increase for both stocks but the increase would be greater for Stock B than for Stock A. O d. The required return would increase for Stock A but decrease for Stock B. O e. The required return would decrease by the same amount for both Stock A and Stock B.

Explanation / Answer

The required return changes by beta for every 1% change in market risk premium.

Hence, stock A's required return would increase by 0.8% for every 1% increase in market risk premium and stock B's required return would increase by 1.2% for every 1% increase in market risk premium.

Hence, Option C

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