Assume That the Risk-Free Rate Remains Constant, but the Market

question 78

Multiple Choice

Assume that the risk-free rate remains constant, but the market risk premium declines. Which of the following is most likely to occurσ

• A) the required return on a stock with beta > 1.0 will increase.
• B) the return on "the market" will remain constant.
• C) the return on "the market" will increase.
• D) the required return on a stock with beta < 1.0 will decline.
• E) the required return on a stock with beta = 1.0 will not change.

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Definitions:

Equity

A system of justice that developed in England separate from the common law courts. Few states in the United States still maintain separate equity courts, though most apply equity principles and procedures when remedies derived from the equity courts are sought. A broader meaning denotes fairness and justice. In business organization law, the capital contributions of owners plus profits that have not been distributed to the owners; stated capital plus capital surplus plus earned surplus.

Partnership Capital

The total resources or assets that partners contribute to a partnership for the purpose of starting or expanding the business.

Trade Name

A commercial name used by a company or business for trading purposes, under which it conducts business or offers services.

Sole Proprietor

An individual who owns and operates a business alone, without forming a corporation or partnership.