Which of the Following Statements Is CORRECT? (Assume That the Risk-Free

question 30

Multiple Choice

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

• A) The effect of a change in the market risk premium depends on the slope of the yield curve.
• B) If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.
• C) If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.
• D) The effect of a change in the market risk premium depends on the level of the risk-free rate.
• E) If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.

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Definitions:

Risk

The potential for loss or the negative consequences that may arise from a given action, decision, or event.

EMV

Expected Monetary Value; a quantitative risk analysis tool used to help in decision-making by calculating the anticipated monetary outcome of different scenarios.

Payoff

The return or benefit received from an investment or action, often used in the context of games, negotiations, and financial investments.

States of Nature

Hypothetical conditions that represent possible scenarios or outcomes in decision making and probabilistic analysis.