Assume That in Recent Years Both Expected Inflation and the Market

question 46

Multiple Choice

Assume that in recent years both expected inflation and the market risk premium (r_M - r_RF) have declined.Assume also that all stocks have positive betas.Which of the following would be most likely to have occurred as a result of these changes?

• A) The required returns on all stocks have fallen,but the decline has been greater for stocks with lower betas.
• B) The required returns on all stocks have fallen,but the fall has been greater for stocks with higher betas.
• C) The average required return on the market,r_M,has remained constant,but the required returns have fallen for stocks that have betas greater than 1.0.
• D) Required returns have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0.
• E) The required returns on all stocks have fallen by the same amount.

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Definitions:

Loanable Funds

The money available for borrowing in the financial markets, determined by savings and demands for loans.

Foreign-Currency Exchange

The process of converting one currency into another currency, a key element in international trade and investment.

Tax Credit

is an amount by which taxpayers can reduce the taxes they owe to the government, directly offsetting their tax liability rather than reducing taxable income.

Investment Projects

Initiatives undertaken by individuals, companies, or governments to allocate capital in the expectation of generating returns over time.