Assume That Investors Have Recently Become More Risk Averse, So

question 130

Multiple Choice

Assume that investors have recently become more risk averse, so the market risk premium has increased. Also, assume that the risk-free rate and expected inflation have not changed. Which of the following is most likely to occurσ

• A) the required rate of return will decline for stocks whose betas are less than 1.0.
• B) the required rate of return on the market, rm, will not change as a result of these changes.
• C) the required rate of return for each individual stock in the market will increase by an amount equal to the increase in the market risk
• D) the required rate of return on a riskless bond will decline.
• E) the required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium.

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Definitions:

Work in Process Inventory

Inventory that includes all the materials, labor, and overhead costs for products that are in the process of being manufactured but are not yet complete.

Direct Materials

Raw materials that directly become a part of a finished product and can be easily traced to the product.

Manufacturing Overhead

All indirect costs associated with the production process, including utilities, rent, and salaries of support staff.

Period Costs

Period costs are expenses that are not directly tied to production activities and are expensed in the period they are incurred; examples include administrative salaries and marketing costs.