Dixon Food's Stock Has a Beta of 1

question 100

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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Definitions:

Collaborative Problem Solving

this method involves two or more individuals working together in a cooperative manner to solve a problem or achieve a goal.

Group Potency

The collective belief of a team in its own capability to succeed in a given task or project.

Cognitive Abilities

The mental capabilities that include reasoning, problem solving, planning, abstract thinking, complex idea comprehension, learning from experience, and adaptation to the environment.

Team Norms

Informal rules and standards that guide the behavior of team members and help in regulating team function.