Which of the Following Statements Is CORRECT? (Assume That the Risk-Free

question 30

Multiple Choice

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

• A) The effect of a change in the market risk premium depends on the slope of the yield curve.
• B) If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.
• C) If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.
• D) The effect of a change in the market risk premium depends on the level of the risk-free rate.
• E) If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.

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Definitions:

Odds

A measure used in statistics and gambling to express the likelihood of a particular outcome, calculated as the ratio of the probability of the event occurring to the probability of it not occurring.

Myopia

A common eye condition where close objects appear clearly, but distant ones are blurred, often referred to as nearsightedness.

Random Sample

A selected subset of individuals from a larger population, chosen randomly to represent the population in a statistical analysis.

Odds

The ratio of the probability of an event occurring to the probability of it not occurring, used in probability theory and statistics.