Assume that the risk-free rate, rRF, increases but the market risk premium, , de

Question

Assume that the risk-free rate, rRF, increases but the market risk premium, , declines with the net effect being that the overall required return on the market, rM, remains constant. Which of the following statements is CORRECT? The required return of all stocks will increase by the amount of the increase in the risk-free rate. The required return will decline for stocks that have a beta less than 1.0 but will increase for stocks that have a beta greater than 1.0. Since the overall return on the market stays constant, the required return on each individual stock will also remain constant. The required return will increase for stocks that have a beta less than 1.0 but decline for stocks that have a beta greater than 1.0. The required return of all stocks will fall by the amount of the decline in the market risk premium.

Explanation / Answer

Option-(D) "The required return will increase for stocks that have a beta less than 1.0 but will decline for stocks that have a beta greater than 1.0" is correct.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

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