The Risk-Free Rate Is 6%; Stock a Has a Beta

question 98

Multiple Choice

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) 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.
• B) Stock B's required rate of return is twice that of Stock A.
• C) If Stock A's required return is 11%, then the market risk premium is 5%.
• D) If Stock B's required return is 11%, then the market risk premium is 5%.
• E) 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.

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Definitions:

Internal Control

Internal Control refers to the processes and procedures implemented by a business to safeguard its assets, ensure the integrity of its accounting records, and enhance the effectiveness and efficiency of its operations.

Approved Voucher

A document that authorizes a payment and records the details of the transaction, having been reviewed and approved for payment.

Separation Of Duties

An internal control measure that prevents fraud and errors by dividing responsibilities among different employees.

Unpaid Voucher File

A file that keeps track of vouchers which have been issued but not yet paid.