Risk-Free Rate Is 6%; Stock a Has a Beta of 1.0;

question 7

Multiple Choice

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

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Definitions:

Probability Density Function

A mathematical function that indicates how likely it is for a random variable to adopt a particular value.

Exponential Distribution

A probability distribution used to model the time between events in a Poisson process, where events occur continuously and independently at a constant average rate.

Parameter

A numerical characteristic that summarizes or describes an aspect of a population in statistics.

Exponentially Distributed

A probability distribution that characterizes the interval between occurrences in a process where events continually and independently happen at a steady average pace.