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:

Schizophrenia

A chronic psychological disorder characterized by a disruption in the connections among cognition, emotion, and conduct, resulting in incorrect perceptions and unsuitable behaviors and emotions.

Hearing Voices

The experience of hearing sounds, often in the form of voices, in the absence of external stimuli, commonly associated with conditions such as schizophrenia or during extreme stress.

Acute Schizophrenia

A term sometimes used to describe the sudden onset of schizophrenia symptoms, such as delusions and hallucinations, which require immediate medical attention.

Positive Symptoms

In psychiatry, manifestations like hallucinations or delusions that are added to a person's behavior.