The Risk-Free Rate Is 6%; Stock a Has a Beta

question 21

Multiple Choice

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, rM - rRF, is positive.Which of the following statements is CORRECT?

• A) Stock B's required rate of return is twice that of Stock A.
• B) If Stock A's required return is 11%, then the market risk premium is 5%.
• C) If Stock B's required return is 11%, then the market risk premium is 5%.
• D) If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's.
• E) If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's.

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