Assume That Investors Have Recently Become More Risk Averse,so the Market

question 22

Multiple Choice

Assume that investors have recently become more risk averse,so the market risk premium has increased.Also,assume that the risk-free rate and expected inflation have not changed.Which of the following is most likely to occur?

• A)The required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium.
• B)The required rate of return will decline for stocks whose betas are less than 1.0.
• C)The required rate of return on the market, r_M, will not change as a result of these changes.
• D)The required rate of return for each individual stock in the market will increase by an amount equal to the increase in the market risk premium.

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Definitions:

Sales

The exchange of a commodity or service for money; the action of selling something.

Variable Costing

A costing method that includes only variable manufacturing costs (direct materials, direct labor, and variable manufacturing overhead) in product costs and treats fixed manufacturing overhead as a period expense.

Generally Accepted Accounting Principles

A set of accounting standards, guidelines, and procedures used in the preparation of financial statements to ensure consistency and transparency.

Stockholders

Individuals or entities that own shares in a corporation, giving them various rights like voting on company matters and receiving dividends.