Suppose That Federal Reserve Actions Have Caused an Increase in the Risk-Free

question 70

Multiple Choice

Suppose that Federal Reserve actions have caused an increase in the risk-free rate, rRF. Meanwhile, investors are afraid of a recession, so the market risk premium, (rM - rRF) , has increased. 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, but the increase would be greatest for stocks with betas of less than 1.0.
• B) stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices.
• C) the prices of all stocks would decline, but the decline would be greatest for high-beta stocks.
• D) the prices of all stocks would increase, but the increase would be greatest for high-beta stocks.
• E) the required return on all stocks would increase by the same amount.

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Definitions:

α-Amylase

An enzyme that breaks down starches into sugars, playing a critical role in the digestion of carbohydrates.

Gibberellin

A plant hormone involved in many aspects of plant growth and development, such as stem elongation, flowering, and seed germination

Stem Elongation

A phase of plant growth where the stem or shoot rapidly increases in length due to cell division and elongation.

Gibberellin

A class of plant hormones that regulate growth and influence various developmental processes, including stem elongation and germination.