Stock HB has a beta of 1.7 and Stock LB has a beta of 0.9. The market is in equilibrium, with required returns equalling expected returns. Which of the following statements is correct?
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If expected inflation remains constant but the market risk premium (rM– rRF) increases, the required return of Stock LB will increase but the required return of Stock HB will decrease.
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If expected inflation remains constant but the market risk premium (rM– rRF) increases, the required return on Stock HB will increase but the required return of Stock LB will decrease.
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If both expected inflation and the market risk premium (rM– rRF) decrease, the required returns of both stocks will decrease by the same amount.
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If both expected inflation and the market risk premium (rM– rRF) decrease, the required return on Stock HB will decrease by more than that of Stock LB.
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