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? rRF) were to increase but the risk-free rate (rRF) remained constant, which of the following would occur?
A. The required return would decrease by the same amount for both Stock A and Stock B.
B. The required return would increase for Stock A but decrease for Stock B.
C. The required return on Portfolio P would remain unchanged.
D. The required return would increase for Stock B but decrease for Stock A.
E. The required return would increase for both stocks but the increase would be greater for Stock B than for Stock A.
Answer: E
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