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

question 71

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

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Definitions:

Adjusted Trial Balance

A list of all accounts and their balances after adjustments have been made, used to ensure that total debits equal total credits before preparing financial statements.

Ledger Account Balances

The current balances in ledger accounts, reflecting all transactions recorded over time.

Liability Account

An account documenting the obligations or debts a company owes to others, which must be settled over time.

Normal Balance

The usual debit or credit balance that an account type is expected to have, which helps in ensuring the correct recording of transactions.