The Risk-Free Rate Is 6%; Stock a Has a Beta

question 75

Multiple Choice

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, r_M − r_RF, is positive. Which of the following statements is CORRECT?

• A) If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's.
• B) Stock B's required rate of return is twice that of Stock A.
• C) If Stock A's required return is 11%, then the market risk premium is 5%.
• D) If Stock B's required return is 11%, then the market risk premium is 5%.
• E) If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's.

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Definitions:

Medicare Tax

A federal tax taken from earnings to fund the Medicare program, which provides health insurance for individuals aged 65 and older.

Employer Payroll Taxes

Taxes that employers are required to pay on behalf of their employees, including contributions to social security, Medicare, and unemployment taxes.

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A charge imposed by the federal government of the United States on the yearly income of individuals, corporations, trusts, and various legal bodies.

Social Security Tax

Social security tax is a tax levied by the government to fund social security programs, typically deducted from an employee's paycheck and also matched by employers.