Nile Food's Stock Has a Beta of 1

question 67

Multiple Choice

Nile Food's stock has a beta of 1.4,while Elba Eateries' 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 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 Nile since it has a higher beta.
• B) If the market risk premium increases but the risk-free rate remains unchanged,Nile's required return will increase because it has a beta greater than 1.0 but Elba's required return will decline because it has a beta less than 1.0.
• C) Since Nile's beta is twice that of Elba's,its required rate of return will also be twice that of Elba's.
• D) If the risk-free rate increases while the market risk premium remains constant,then the required return on an average stock will increase.
• E) If the market risk premium decreases but the risk-free rate remains unchanged,Nile's required return will decrease because it has a beta greater than 1.0 and Elba's will also decrease,but by more than Nile's because it has a beta less than 1.0.

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Definitions:

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