Assume That the Risk-Free Rate, R_RF, Increases but the Market

question 90

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 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.
• B) Since the overall return on the market stays constant, the required return on each individual stock will also remain constant.
• C) 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.
• D) The required return of all stocks will fall by the amount of the decline in the market risk premium.
• E) The required return of all stocks will increase by the amount of the increase in the risk-free rate.

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Definitions:

Noncurrent Assets

Assets expected to provide economic benefits beyond one year or the normal operating cycle of the business, including property, plant, and equipment, as well as intangible assets.

Unrealized Gains

Increases in the value of an asset that has not been sold yet, thus not resulting in actual cash flow or taxable income until the asset is sold.

Trading Securities

Financial instruments such as stocks or bonds that a company holds with the intent of selling them in the short term to profit from price fluctuations.

Broker Commission

A fee paid to a broker for their services, usually a percentage of the transaction value.