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:

Unionization

The process of organizing the employees of a company into a labor union to negotiate wages, working conditions, and other employment terms.

Union-Management Negotiation

The process in which labor union representatives and company management discuss and agree on workplace conditions, wages, and policies.

Mediation

A form of alternative dispute resolution where a neutral third party helps disputants come to a consensus on their own.

Arbitration

A method of resolving disputes outside of court where an impartial third party delivers a conclusive judgement to settle a disagreement between parties.