The risk-free rate is 6% and the market risk premium is 5%. Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. Which of the following statements is CORRECT?
A. If the stock market is efficient, your portfolio's expected return should equal the expected return on the market, which is 11%.
B. The required return on the market is 10%.
C. The portfolio's required return is less than 11%.
D. If the risk-free rate remains unchanged but the market risk premium increases by 2%, your portfolio's required return will increase by more than 2%.
E. If the market risk premium remains unchanged but expected inflation increases by 2%, your portfolio's required return will increase by more than 2%.
Answer: D
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