Dixon Food's Stock Has a Beta of 1

question 39

Multiple Choice

Dixon Food's stock has a beta of 1.4, while Clark Café's stock has a beta of 0.7.Assume that the risk-free rate, r_RF, is 5.5% and the market risk premium, (r_M − r_RF) , equals 4%.Which of the following statements is CORRECT?

• A) If the market risk premium increases but the risk-free rate remains unchanged, Dixon's required return will increase because it has a beta greater than 1.0 but Clark's required return will decline because it has a beta less than 1.0.
• B) Since Dixon's beta is twice that of Clark's, its required rate of return will also be twice that of Clark's.
• C) If the risk-free rate increases while the market risk premium remains constant, then the required return on an average stock will increase.
• D) If the market risk premium decreases but the risk-free rate remains unchanged, Dixon's required return will decrease because it has a beta greater than 1.0 and Clark's will also decrease, but by more than Dixon's because it has a beta less than 1.0.
• E) If the risk-free rate increases but the market risk premium remains unchanged, the required return will increase for both stocks but the increase will be larger for Dixon since it has a higher beta.

---

Definitions:

Natural Selection

A process in evolution by which organisms that are better adapted to their environment tend to survive longer and transmit more of their genetic characteristics to succeeding generations.

Evolution

The process through which species of organisms undergo change over time through variations in hereditary traits and natural selection.

Humans

Members of the species Homo sapiens, characterized by their capacity for complex language, reasoning, and social organization.

Lonely Friends

Individuals who feel isolated or disconnected from others despite having friendships.