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.

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Definitions:

Union Wage

The standard wage rate established through collective bargaining by unions on behalf of their members.

Fiscal Policies

Fiscal policies are government spending and tax policies used to influence economic conditions, including aggregate demand, employment, and inflation.

Cyclical Unemployment

Cyclical unemployment is the result of downturns in the business cycle, rising during economic recessions and declining in periods of economic growth.

Aggregate Demand

The total demand for all goods and services within an economy at a given overall price level and time.