Assume That the Risk-Free Rate,r_RF,increases but the Market Risk Premium

question 131

Multiple Choice

Assume that the risk-free rate,r_RF,increases but the market risk premium, (r_M - r_RF) ,declines with the net effect being that the overall required return on the market,r_M,remains constant.Which of the following statements is CORRECT?

• A) The required return of all stocks will increase by the amount of the increase in the risk-free rate.
• B) The required return will decline for stocks that have a beta less than 1.0 but will increase for stocks that have a beta greater than 1.0.
• C) Since the overall return on the market stays constant,the required return on each individual stock will also remain constant.
• D) The required return will increase for stocks that have a beta less than 1.0 but decline for stocks that have a beta greater than 1.0.
• E) The required return of all stocks will fall by the amount of the decline in the market risk premium.

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