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 market risk premium remains unchanged but expected inflation increases by 2%, your portfolio’s required return will increase by more than 2%.

b.The portfolio’s required return is less than 11%.

c.The required return on the market is 10%.

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 stock market is efficient, your portfolio’s expected return should equal the expected return on the market, which is 11%.

Answer: The correct answer is 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%.

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