During the next year, the market risk premium, is expected to fall, while the ri
ID: 2646631 • Letter: D
Question
During the next year, the market risk premium, is expected to fall, while the risk-free rate, is expected to remain the same. Given this forecast, which of the following statements is correct?
a. The required return will fall for all stocks, but it will fall more for stocsk with higher betas
b. The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0
c. The requied return for all stocks will fall by the same amount
d. The required return will fall for all stocks, but it will fall less for stocks with higher betas
Explanation / Answer
During the next year, the market risk premium, is expected to fall, while the risk-free rate, is expected to remain the same. Given this forecast, which of the following statements is correct?
Answer: (d) The requried return will fall for all stocks, but it will fall less for stocks with higher betas.
Note: Here, risk-free rate is constant.But, risk premium is expected to fall in the next year. Accourding to Capital Asset Pricing Model, risk premium is totally influenced by market rate of return. Risk premuim is multiplied by beta value that increase the required rate of return.Hence, required return will fall for all stocks, if risk premium is expected to decrease.but, it will fall less for stocks wih higher betas. It is beacause, beta is multiplied by risk premium.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.