Answer:
c. 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
This statement is correct because an increase in inflation is a risk which will be reflected by an increase in the risk free rate. Also increase Beta is that sensitivity of the stocks to the market risk premium, and having different betas does not affect the the increase in expected rate of return caused by inflation.
Explanation:
a. 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
This statement is wrong because if you invest 50,000 in stock X and 50, 000 in stock B you will have a beta of 1
50,000/100,000=0.5
(0.5*1.5)+(0.5*0.5)=0.75+0.25=1
b. Stock Y's realized return during the coming year will be higher than Stock X's return
This statement is wrong because although stock y's expected return will be higher because it has a higher beta, realized returns cannot be decided beforehand and will have to wait and see how the market reacts
d. Stock Y's return has a higher standard deviation than Stock X.
This statement is wrong because we do not have any information about any of the stocks standard deviation and knowing the betas is not enough to find the standard deviation.
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.
This statement is wrong because stock y has a bigger beta than stock x which means that when the risk premium declines stock y will have a larger decline.
