Assume That the Risk-Free Rate,r_RF,increases but the Market Risk Premium,(r_M

question 68

Multiple Choice

Assume that the risk-free rate,r_RF,increases but the market risk premium,(r_M - r_RF) declines,with the net effect being that the overall required return on the market,r_M,remains constant.Which of the following statements is correct?

• A)The required return of all stocks will increase by the amount of the increase in the risk-free rate.
• B)The required return will decline for stocks that have a beta less than 1.0 but will increase for stocks that have a beta greater than 1.0.
• C)Since the overall return on the market stays constant, the required return on each individual stock will remain constant.
• D)The required return will increase for stocks that have a beta less than 1.0 but decline for stocks that have a beta greater than 1.0.

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Definitions:

Directional Alternative

A hypothesis that outlines the anticipated direction in the variation or association among variables.

T-statistic

A T-statistic is used in statistical testing to determine the significance of the difference between the means of two groups relative to the spread or variability of their scores.

Means

Statistical measures that represent the average value in a set of numbers, calculated by dividing the sum of all numbers by the count of numbers.

Null Hypothesis

The default hypothesis that there is no effect or no difference, and any observed deviation from this state is due to chance.