Food's Stock Has a Beta of 1

question 135

Multiple Choice

Food's stock has a beta of 1.4, while Elba Eateries' stock has a beta of 0.7.Assume that the risk-free rate, rRF, is 5.5% and the market risk premium, (rM − rRF) , equals 4%.Which of the following statements is CORRECT?

• A)If the risk-free rate increases but the market risk premium remains unchanged, the required return will increase for both stocks but the increase will be larger for Nile since it has a higher beta.
• B)If the market risk premium increases but the risk-free rate remains unchanged, Nile's required return will increase because it has a beta greater than 1.0 but Elba's required return will decline because it has a beta less than 1.0.
• C)Since Nile's beta is twice that of Elba's, its required rate of return will also be twice that of Elba's.
• D)If the risk-free rate increases while the market risk premium remains constant, then the required return on an average stock will increase.
• E)If the market risk premium decreases but the risk-free rate remains unchanged, Nile's required return will decrease because it has a beta greater than 1.0 and Elba's will also decrease, but by more than Nile's because it has a beta less than 1.0.

---

Definitions:

Mixed Feelings

Mixed feelings describe a state of having conflicting emotions or thoughts about a particular situation or person.

Death Darers

Individuals who engage in behavior that has a significant risk of death, but without a definite intent to die; they may have ambivalence towards living or dying.

Kill Themselves

Refers to the act of taking one's own life, also known as suicide.

Chronic Suicide

Engaging in behaviors or lifestyle choices that significantly increase the risk of death, often seen in chronic self-destructive patterns.