Assume That in Recent Years Both Expected Inflation and the Market

question 115

Multiple Choice

Assume that in recent years both expected inflation and the market risk premium (r_M - r_RF) have declined.Assume also that all stocks have positive betas.Which of the following would be most likely to have occurred as a result of these changes?

• A)The required returns on all stocks would have fallen, but the decline would have been greater for stocks with lower betas.
• B)The required returns on all stocks would have fallen, but the fall would have been greater for stocks with higher betas.
• C)Required returns would have increased for stocks with betas greater than 1.0 but would have declined for stocks with betas less than 1.0.
• D)The required returns on all stocks would have fallen by the same amount.

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Definitions:

Parasympathetic Ganglia

Clusters of neurons in the parasympathetic nervous system that regulate bodily functions to conserve energy and maintain homeostasis.

Terminal Ganglia

Nerve cell clusters located near or within the organs they innervate, involved in the autonomic nervous system.

Parasympathetic Fibers

Nerve fibers of the parasympathetic nervous system that regulate body functions, promoting rest and digestion.

Hypoglossal Nerve

The twelfth cranial nerve responsible for motor control of the tongue, essential for swallowing and speech.