Suppose That Federal Reserve Actions Have Caused an Increase in the Risk-Free

question 143

Multiple Choice

Suppose that Federal Reserve actions have caused an increase in the risk-free rate,r_RF.Meanwhile,investors are afraid of a recession,so the market risk premium, (r_M -r_RF) ,has increased.Under these conditions,with other things held constant,which of the following statements is most correct?

• A) The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0.
• B) Stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices.
• C) The prices of all stocks would decline, but the decline would be greatest for high-beta stocks.
• D) The prices of all stocks would increase, but the increase would be greatest for high-beta stocks.
• E) The required return on all stocks would increase by the same amount.

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