Assume That in Recent Years Both Expected Inflation and the Market

question 115

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 would have fallen, but the decline would have been greater for stocks with lower betas.
• B)The required returns on all stocks would have fallen, but the fall would have been greater for stocks with higher betas.
• C)Required returns would have increased for stocks with betas greater than 1.0 but would have declined for stocks with betas less than 1.0.
• D)The required returns on all stocks would have fallen by the same amount.

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Definitions:

Sample Average

The arithmetic mean of a set of numerical values, calculated by adding them together and dividing by the number of samples.

Skewed Distribution

A statistical term describing a distribution that is not symmetrical and has a long tail on one side of the peak.

Population Average

The mean value of a particular characteristic or measurement across an entire population.

Standard Deviation

A measure of the amount of variation or dispersion of a set of values, indicating how much individual values in a dataset differ from the mean.