26. Which of the following statements is CORRECT? (Assume that the risk-free rat

Question

26.

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

a. If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0. b. The effect of a change in the market risk premium depends on the level of the risk-free rate. c. If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0. d. The effect of a change in the market risk premium depends on the slope of the yield curve. e. If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%

Explanation / Answer

26.

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

c. If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.

Note :

As per CAPM

Required return = Risk Free rate + market risk premium * beta

In this option beta = 1 and Risk Free rate is constant and market risk premium rises by 1%

Required return would increase by = Increase in market risk premium*beta

Required return would increase by = 1%*1

Required return would increase by = 1%

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.