Assume That in Recent Years Both Expected Inflation and the Market

question 43

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

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Definitions:

Conditioned Stimulus

A previously neutral stimulus that, after becoming associated with the unconditioned stimulus, eventually comes to trigger a conditioned response.

Unconditioned Stimulus

In classical conditioning, a stimulus that naturally and automatically triggers a response without any prior learning.

Partial Conditioner

An agent or factor that has a conditional effect, contributing to an outcome only in certain contexts or situations.

Unconditioned Responses

Automatic, natural reactions to stimuli that occur without prior learning or conditioning, such as reflex actions.