Assume That in Recent Years Both Expected Inflation and the Market

question 46

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 have fallen,but the decline has been greater for stocks with lower betas.
• B) The required returns on all stocks have fallen,but the fall has been greater for stocks with higher betas.
• C) The average required return on the market,r_M,has remained constant,but the required returns have fallen for stocks that have betas greater than 1.0.
• D) Required returns have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0.
• E) The required returns on all stocks have fallen by the same amount.

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Definitions:

Critical Thinking

The process of actively and skillfully conceptualizing, applying, analyzing, synthesizing, and evaluating information to reach an answer or conclusion.

Interdependence

A dynamic of being mutually reliant on each other, where the actions of one entity or person affect the outcome of another.

Cohesiveness

The degree to which members of a group or team are united and work together to achieve a common goal.

Person Perception

The process of forming impressions and making judgments about the characteristics and motives of others.