Question Details

Which of the following would be most likely to have occurred 


1.	During the coming year, the market risk premium (rM − rRF), is expected to fall, while the risk-free rate, rRF, is expected to remain the same.  Given this forecast, which of the following statements is CORRECT?
a.	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.
b.	The required return on all stocks will remain unchanged.
c.	The required return will fall for all stocks, but it will fall more for stocks with higher betas.
d.	The required return for all stocks will fall by the same amount.
e.	The required return will fall for all stocks, but it will fall less for stocks with higher betas.
	
2.	The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, rM − rRF, is positive.  Which of the following statements is CORRECT?
a.	If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's.
b.	Stock B's required rate of return is twice that of Stock A.
c.	If Stock A's required return is 11%, then the market risk premium is 5%.
d.	If Stock B's required return is 11%, then the market risk premium is 5%.
e.	If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's.
	

3.	Assume that in recent years both expected inflation and the market risk premium (rM − rRF) have declined.  Assume also that all stocks have positive betas.  Which of the following would be most likely to have occurred as a result of these changes?
a.	The required returns on all stocks have fallen, but the decline has been greater for stocks with lower betas.
b.	The required returns on all stocks have fallen, but the fall has been greater for stocks with higher betas.
c.	The average required return on the market, rM, has remained constant, but the required returns have fallen for stocks that have betas greater than 1.0.
d.	Required returns have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0.
e.	The required returns on all stocks have fallen by the same amount.

4.	Assume that the risk-free rate is 5%.  Which of the following statements is CORRECT?
a.	If a stock has a negative beta, its required return under the CAPM would be less than 5%.
b.	If a stock's beta doubled, its required return under the CAPM would also double.
c.	If a stock's beta doubled, its required return under the CAPM would more than double.
d.	If a stock's beta were 1.0, its required return under the CAPM would be 5%.
e.	If a stock's beta were less than 1.0, its required return under the CAPM would be less than 5%.
	
5.	Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5.  The market is in equilibrium, with required returns equaling expected returns.  Which of the following statements is CORRECT?
a.	If expected inflation remains constant but the market risk premium (rM − rRF) declines, the required return of Stock LB will decline but the required return of Stock HB will increase.
b.	If both expected inflation and the market risk premium (rM − rRF) increase, the required return on Stock HB will increase by more than that on Stock LB.
c.	If both expected inflation and the market risk premium (rM − rRF) increase, the required returns of both stocks will increase by the same amount.
d.	Since the market is in equilibrium, the required returns of the two stocks should be the same.
e.	If expected inflation remains constant but the market risk premium (rM − rRF) declines, the required return of Stock HB will decline but the required return of Stock LB will increase.



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