Assume That in Recent Years Both Expected Inflation and the Market

question 127

Multiple Choice

Assume that in recent years both expected inflation and the market risk premium (rM − rRF) 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, rM, 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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