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.

---

Definitions:

Distributive Responsibility

Involves the allocation or sharing of responsibilities, resources, or benefits among various members of a group or society in a fair and equitable manner.

Intuition

The ability to understand or know something immediately based on instincts rather than conscious reasoning.

Serendipity

The occurrence of events by chance in a happy or beneficial way, often leading to unexpected and valuable discoveries.

Accidental Discovery

The process of finding something important or useful without actively searching for it, typically resulting in unexpected innovation or knowledge.