Nile Food's Stock Has a Beta of 1

question 67

Multiple Choice

Nile Food's stock has a beta of 1.4,while Elba Eateries' stock has a beta of 0.7.Assume that the risk-free rate,r_RF,is 5.5% and the market risk premium, (r_M - r_RF) ,equals 4%.Which of the following statements is CORRECT?

• A) 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 Nile since it has a higher beta.
• B) If the market risk premium increases but the risk-free rate remains unchanged,Nile's required return will increase because it has a beta greater than 1.0 but Elba's required return will decline because it has a beta less than 1.0.
• C) Since Nile's beta is twice that of Elba's,its required rate of return will also be twice that of Elba's.
• D) If the risk-free rate increases while the market risk premium remains constant,then the required return on an average stock will increase.
• E) If the market risk premium decreases but the risk-free rate remains unchanged,Nile's required return will decrease because it has a beta greater than 1.0 and Elba's will also decrease,but by more than Nile's because it has a beta less than 1.0.

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Definitions:

Endocrine System

The collection of glands that produce hormones to regulate metabolism, growth and development, tissue function, sexual function, reproduction, sleep, and mood, among other things.

Hormones

Chemical messengers secreted by endocrine glands that regulate various physiological processes in the body.

Lymphatic System

The network of organs, lymph nodes, ducts, and vessels that produce and transport lymph from tissues to the bloodstream, important for the immune system.

Interstitial Fluid

Interstitial fluid is the fluid that surrounds the cells in tissues, providing them with nutrients and a means of waste removal, lying between blood vessels and cells.