Suppose That Federal Reserve Actions Have Caused an Increase in the Risk-Free

question 103

Multiple Choice

Suppose that Federal Reserve actions have caused an increase in the risk-free rate, rRF.Meanwhile, investors are afraid of a recession, so the market risk premium, (rM - rRF) , has increased.Under these conditions, with other things held constant, which of the following statements is most correct?

• A) The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0.
• B) Stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices.
• C) The prices of all stocks would decline, but the decline would be greatest for high-beta stocks.
• D) The prices of all stocks would increase, but the increase would be greatest for high-beta stocks.
• E) The required return on all stocks would increase by the same amount.

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Definitions:

Producer Surplus

The difference between the amount producers are willing to accept for a good or service versus what they actually receive.

Tax

A compulsory financial charge imposed by a government on individuals, corporations, or other entities to fund government spending and public services.

Market Price

The current price at which a good or service can be bought or sold in a marketplace, determined by supply and demand.

Government Subsidy

Financial assistance provided by the government to support a specific industry, entity, or activity that is considered beneficial for the public.