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

question 84

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, r_M − r_RF, 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:

Produces At

The specific point or condition under which production occurs, focusing on the level of output and the resources used.

Low Cost

Refers to products or services that are offered at a minimal financial expense, making them accessible to a wider range of consumers.

Comparative Advantage

The ability of an individual, company, or country to produce a good or service at a lower opportunity cost than another.

Competitive World Market

A global economic environment where businesses compete across borders to offer the best products and services.