Assume that the risk free rate is 6% and the market risk premium is 5%. Given th

Question

Assume that the risk free rate is 6% and the market risk premium is 5%. Given this information, which of the following statements is correct?
A. If a stocks beta doubles, its required return must also double
B. An index fund with beta = 1.0 should have a required return less than 11%.
C. An index fund with beta = 1.0 should have a required return of 11%.
D. If a stock has a negative beta, its required return must also be negative.
E. An index fund with beta = 1.0 should have a required return greater than 11%.

Explanation / Answer

Assume that the risk free rate is 6% and the market risk premium is 5%. Given this information, which of the following statements is correct?
A. If a stocks beta doubles, its required return must also double
B. An index fund with beta = 1.0 should have a required return less than 11%.
C. An index fund with beta = 1.0 should have a required return of 11%.
D. If a stock has a negative beta, its required return must also be negative.
E. An index fund with beta = 1.0 should have a required return greater than 11%.

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