Assume That in Recent Years Both Expected Inflation and the Market

question 127

Multiple Choice

Assume that in recent years both expected inflation and the market risk premium (rM − rRF) have declined. Assume also that all stocks have positive betas. Which of the following would be most likely to have occurred as a result of these changes?

• A) The required returns on all stocks have fallen, but the decline has been greater for stocks with lower betas.
• B) The required returns on all stocks have fallen, but the fall has been greater for stocks with higher betas.
• C) The average required return on the market, rM, has remained constant, but the required returns have fallen for stocks that have betas greater than 1.0.
• D) Required returns have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0.
• E) The required returns on all stocks have fallen by the same amount.

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Definitions:

Interval Variable

A type of quantitative variable that represents data with meaningful intervals between measurements, but without a true zero point.

Age

A measure of time that an individual has been alive, typically expressed in years.

Midterm

An examination or assessment occurring in the middle of an academic term or course.

Relationship

The way in which two or more concepts, objects, or people are connected, or the state of being connected.