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

question 115

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.

---

Definitions:

Excise Tax

A tax levied on the production of a specific product or on the quantity of the product purchased.

Tax Revenues

The income that is gained by governments through taxation, an important source of revenue for government expenditures.

Inelastic Demand

A situation in which the demand for a product does not significantly change with a change in its price.

Price-Elastic

Refers to the degree to which the demand for a product changes in response to a change in its price.