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

question 29

Multiple Choice

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

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

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Definitions:

Central Nervous System

A complex system of nerves and cells that control activities within the body, comprising the brain and spinal cord.

Brain

The brain is an organ of the central nervous system, responsible for processing sensory information and coordinating bodily functions along with cognition and emotions.

Spinal Cord

The spinal cord is a long, thin, tubular structure made up of nervous tissue that extends from the brainstem to the lower back, functioning as the main pathway for information connecting the brain and peripheral nervous system.

Allostatic Load

The wear and tear on the body which accumulates as an individual is exposed to repeated or chronic stress.