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:

Inference Forms

Logical sequences in which the conclusion is a direct result of the premises presented.

MP

Short for Member of Parliament, an individual elected to serve as a representative of the citizens in the parliamentary government.

Conj

An abbreviation often used for "conjunction," a logical operation that combines two conditions or statements, resulting in truth only if both elements are true.

Inference Forms

Standardized patterns of reasoning, where specific premises lead to a certain conclusion.