Assume That the Risk-Free Rate Remains Constant, but the Market

question 10

Multiple Choice

Assume that the risk-free rate remains constant, but the market risk premium declines. Which of the following is most likely to occur?

• A) The required return on a stock with beta = 1.0 will not change.
• B) The required return on a stock with beta > 1.0 will increase.
• C) The return on "the market" will remain constant.
• D) The return on "the market" will increase.
• E) The required return on a stock with beta < 1.0 will decline.

Identify and justify the use of taxes or subsidies to achieve social optimum.

Analyze the impact of externalities on private and social costs and benefits.

Explain the concept of market equilibrium and how it is affected by externalities.

Understand the role of governmental policies in correcting market failures due to externalities.

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