Suppose That Federal Reserve Actions Have Caused an Increase in the Risk-Free

question 108

Multiple Choice

Suppose that Federal Reserve actions have caused an increase in the risk-free rate, r_RF.Meanwhile, investors are afraid of a recession, so the market risk premium, (r_M − r_RF) , 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:

Element C

Element C refers to Carbon, a chemical element with symbol C and atomic number 6, essential to all known living systems and widely used in various scientific, industrial, and technological applications.

Calcite

A common mineral form of calcium carbonate, widely found in sedimentary, metamorphic, and igneous rocks.

Cleavage

The tendency of a mineral to break along flat, even surfaces as a result of weak bonding in certain directions in the mineral's crystal structure.

Fracture

a break or crack in rock or bone, often resulting from stress or impact.