Which of the Following Statements Is CORRECT

question 109

Multiple Choice

Which of the following statements is CORRECT?

• A) If a company's beta doubles,then its required rate of return will also double.
• B) Other things held constant,if investors suddenly become convinced that there will be deflation in the economy,then the required returns on all stocks should increase.
• C) If a company's beta were cut in half,then its required rate of return would also be halved.
• D) If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount,then the required rates of return on stocks with betas less than 1.0 will decline while returns on stocks with betas above 1.0 will increase.
• E) If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount,then the required rate of return on an average stock will remain unchanged,but required returns on stocks with betas less than 1.0 will rise.

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Definitions:

Interest Rates

The cost of borrowing money or the return on investment for savings, usually expressed as a percentage.

Future Dollars

Money that is adjusted for its future value, accounting for inflation or interest earned over time.

Expected Rate of Return

The anticipated amount of profit or loss an investor expects to achieve on an investment.

Interest Rate

The Interest Rate is the percentage at which interest is paid by a borrower for the use of money that they borrow from a lender.