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

question 90

Multiple Choice

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

• A) 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.
• B) Since the overall return on the market stays constant, the required return on each individual stock will also remain constant.
• C) 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.
• D) The required return of all stocks will fall by the amount of the decline in the market risk premium.
• E) The required return of all stocks will increase by the amount of the increase in the risk-free rate.

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Definitions:

Merchandise Purchases

Transactions where a business acquires goods to be sold later, often at a profit.

Retained Earnings

Accumulated net income not distributed to shareholders and reinvested in the company.

Periodic Inventory System

An inventory accounting system where updates to inventory levels are made periodically, usually at the end of a financial reporting period, as opposed to continuously.

Cost of Goods Sold

The direct costs attributable to the production of the goods sold by a company, including material, labor, and overhead expenses.