Assume That to Cool Off the Economy and Decrease Expectations

question 94

Multiple Choice

Assume that to cool off the economy and decrease expectations for inflation,the Federal Reserve tightened the money supply,causing an increase in the risk-free rate,r_RF.Investors also became concerned that the Fed's actions would lead to a recession,and that led to an increase in the market risk premium, (r_M - r_RF) .Under these conditions,with other things held constant,which of the following statements is most correct?

• A) The required return on all stocks would increase by the same amount.
• B) The required return on all stocks would increase,but the increase would be greatest for stocks with betas of less than 1.0.
• C) Stocks' required returns would change,but so would expected returns,and the result would be no change in stocks' prices.
• D) The prices of all stocks would decline,but the decline would be greatest for high-beta stocks.
• E) The prices of all stocks would increase,but the increase would be greatest for high-beta stocks.

---

Definitions:

Educational Testing

The process of evaluating academic knowledge, skills, abilities, or performance through formalized tests and assessments.

Interpreting Test Results

The process of analyzing and understanding the significance of the outcomes derived from psychological or educational testing.

Test Scoring

The process of assigning values or scores to responses in tests to evaluate performance or abilities.

Technical Knowledge

Specific knowledge related to a particular field of work or technology, often involving understanding complex processes or systems.