Assume That the Risk-Free Rate, R_RF, Increases but the Market

question 90

Multiple Choice

Assume that the risk-free rate, r_RF, increases but the market risk premium, (r_M − r_RF) , declines, with the net effect being that the overall required return on the market, r_M, remains constant.Which of the following statements is CORRECT?

• A) The required return will decline for stocks that have a beta less than 1.0 but will increase for stocks that have a beta greater than 1.0.
• B) Since the overall return on the market stays constant, the required return on each individual stock will also remain constant.
• C) The required return will increase for stocks that have a beta less than 1.0 but decline for stocks that have a beta greater than 1.0.
• D) The required return of all stocks will fall by the amount of the decline in the market risk premium.
• E) The required return of all stocks will increase by the amount of the increase in the risk-free rate.

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