Dixon Food's Stock Has a Beta of 1

question 21

Multiple Choice

Dixon Food's stock has a beta of 1.4, while Clark Café's stock has a beta of 0.7. Assume that the risk-free rate, rRF, is 5.5% and the market risk premium, (rM - rRF) , equals 4%. Which of the following statements is CORRECT?

• A) if the market risk premium increases but the risk-free rate remains unchanged, dixon's required return will increase because it has a beta greater than 1.0 but clark's required return will decline because it has a beta less than 1.0.
• B) since dixon's beta is twice that of clark's, its required rate of return will also be twice that of clark's.
• C) if the risk-free rate increases while the market risk premium remains constant, then the required return on an average stock will increase.
• D) if the market risk premium decreases but the risk-free rate remains unchanged, dixon's required return will decrease because it has a beta greater than 1.0 and clark's will also decrease, but by more than dixon's because it has a beta less than 1.0.
• E) if the risk-free rate increases but the market risk premium remains unchanged, the required return will increase for both stocks but the increase will be larger for dixon since it has a higher beta.

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