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:

Supplies

Materials or items used in the operation of a business or needed in the process of providing a service or making goods.

Accounts Payable

Liabilities owed by a company to its creditors for goods or services that have been delivered or used but not yet paid for.

Balance Sheet

A balance sheet is a financial statement that summarizes a company's assets, liabilities, and shareholders' equity at a specific point in time, giving insight into its financial health.

Income Statement

A financial statement that shows a company’s revenues and expenses over a specific period, resulting in a net profit or loss.