The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, rM? rRF, is positive. Which of the following statements is CORRECT?
A. Stock B's required rate of return is twice that of Stock A.
B. If Stock A's required return is 11%, then the market risk premium is 5%.
C. If Stock B's required return is 11%, then the market risk premium is 5%.
D. If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's.
E. If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's.
Answer: B
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