Assume That the Risk-Free Rate, RRF, Increases but the Market

question 17

Multiple Choice

Assume that the risk-free rate, rRF, increases but the market risk premium, (rM − rRF) , declines with the net effect being that the overall required return on the market, rM, remains constant. Which of the following statements is CORRECT?

• A) The required return of all stocks will increase by the amount of the increase in the risk-free rate.
• B) The required return will decline for stocks that have a beta less than 1.0 but will increase for stocks that have a beta greater than 1.0.
• C) Since the overall return on the market stays constant, the required return on each individual stock will also remain constant.
• D) The required return will increase for stocks that have a beta less than 1.0 but decline for stocks that have a beta greater than 1.0.
• E) The required return of all stocks will fall by the amount of the decline in the market risk premium.

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Definitions:

Labor Demand

The total amount of workers that employers are willing and able to employ at a given wage rate in a given time period.

Labor Market

The marketplace where employers find workers and workers find jobs, characterized by the supply and demand for labor.

Plumbers

Skilled tradespeople who install, maintain, and repair water, gas, and other piping systems in homes and businesses.

Factor Market

The marketplace for services of factors of production (like labor, land, and capital) where firms buy resources needed to produce goods and services.