Which of the Following Statements Is CORRECTσ

question 126

Multiple Choice

Which of the following statements is CORRECTσ

• A) other things held constant, if investors suddenly become convinced that there will be deflation in the economy, then the required returns on all stocks should increase.
• B) if a company's beta were cut in half, then its required rate of return would also be halved.
• C) if the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rates of return on stocks with betas less than 1.0 will decline while returns on stocks with betas above 1.0 will increase.
• D) if the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rate of return on an average stock will remain unchanged, but required returns on stocks with betas less than 1.0 will rise.
• E) if a company's beta doubles, then its required rate of return will also double.

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Definitions:

Variable Administrative Expenses

Costs related to the administration of a business that vary with the level of activity or production.

Fixed Cost

Charges that are stable in spite of the levels of output or sales achieved, such as housing lease, salaries paid to employees, and insurance expenses.

Production Supplies

Items and materials used in the manufacturing process that are not directly incorporated into the final product.

Mainframe Computer

A large, powerful computer primarily used by large organizations for bulk data processing, such as census, industry and consumer statistics, and financial transaction processing.