Assume That in Recent Years Both Expected Inflation and the Market

question 15

Multiple Choice

Assume that in recent years both expected inflation and the market risk premium (rM - rRF) have declined.Assume also that all stocks have positive betas.Which of the following would be most likely to have occurred as a result of these changes?

• A) The required returns on all stocks have fallen, but the fall has been greater for stocks with higher betas.
• B) The average required return on the market, rM, has remained constant, but the required returns have fallen for stocks that have betas greater than 1.0.
• C) Required returns have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0.
• D) The required returns on all stocks have fallen by the same amount.
• E) The required returns on all stocks have fallen, but the decline has been greater for stocks with lower betas.

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Definitions:

Direct Labor

The work of employees that can be directly attributed to the production of goods or services.

Fixed Overhead

Regular, fixed expenses associated with the operations of a business that do not vary with production volume.

Raw Material

Basic materials used in the production process of goods, often processed in intermediate steps before fabrication of the final product.

Fixed Overhead

Charges that keep the same level despite the degree of manufacturing or sales activities, including space rental, worker wages, and protection plans.