Stock X Has ? = 4

question 7

Multiple Choice

Stock X has ? = 4.0,which means that it is considered four times riskier than the average stock,or the stock market as a whole.According to the capital asset pricing model,Stock X should earn

• A) a total return that is four times greater than the market return, that is, r_X = 4 * r_M.
• B) a risk premium that is four times greater than the market risk premium-that is, RP_X = 4 * RP_M, which means that r_X B k_RF = 4 * (r_M B k_RF).
• C) a return that is less than the market return (r_M) because, all else equal, the high risk associated with Stock X will cause its value to decrease.
• D) the risk-free rate of return (r_RF).
• E) None of the above is correct.

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