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:

Employee Stock Ownership Plans

Programs that allow employees to become partial owners of the company they work for through the acquisition of its stock.

U.S. Labor Laws

Laws regulating labor in the United States, which set standards for working conditions, wages, hours, child labor, and the right to collective bargaining.

Corporate Power

The influence or authority that corporations hold within society, often in economic, political, or social contexts.

Nature of Markets

The fundamental characteristics and dynamics of markets, including how goods, services, and resources are distributed and priced through supply and demand.