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Security Market Line would be affected 1. Assume that the risk-free rate remains constant, but the market risk premium declines. Which of the following is most likely to occur? a. The required return on a stock with beta = 1.0 will not change. b. The required return on a stock with beta > 1.0 will increase. c. The return on "the market" will remain constant. d. The return on "the market" will increase. e. The required return on a stock with beta < 1.0 will decline. 2. Which of the following statements is CORRECT? a. The slope of the SML is determined by the value of beta. b. The SML shows the relationship between companies' required returns and their diversifiable risks. The slope and intercept of this line cannot be influenced by a firm's managers, but the position of the company on the line can be influenced by its managers. c. Suppose you plotted the returns of a given stock against those of the market, and you found that the slope of the regression line was negative. The CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well diversified investor, assuming investors expect the observed relationship to continue on into the future. d. If investors become less risk averse, the slope of the Security Market Line will increase. e. If a company increases its use of debt, this is likely to cause the slope of its SML to increase, indicating a higher required return on the stock. 3. Other things held constant, if the expected inflation rate decreases and investors also become more risk averse, the Security Market Line would be affected as follows: a. The y-axis intercept would decline, and the slope would increase. b. The x-axis intercept would decline, and the slope would increase. c. The y-axis intercept would increase, and the slope would decline. d. The SML would be affected only if betas changed. e. Both the y-axis intercept and the slope would increase, leading to higher required returns. 4. Assume that the risk-free rate, rRF, increases but the market risk premium, (rM − rRF), declines with the net effect being that the overall required return on the market, rM, remains constant. Which of the following statements is CORRECT? a. The required return of all stocks will increase by the amount of the increase in the risk-free rate. b. 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. c. Since the overall return on the market stays constant, the required return on each individual stock will also remain constant. d. 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. e. The required return of all stocks will fall by the amount of the decline in the market risk premium. 5. Assume that to cool off the economy and decrease expectations for inflation, the Federal Reserve tightened the money supply, causing an increase in the risk-free rate, rRF. Investors also became concerned that the Fed's actions would lead to a recession, and that led to an increase in the market risk premium, (rM - rRF). Under these conditions, with other things held constant, which of the following statements is most correct? a. The required return on all stocks would increase by the same amount. b. The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0. c. Stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices. d. The prices of all stocks would decline, but the decline would be greatest for high-beta stocks. e. The prices of all stocks would increase, but the increase would be greatest for high-beta stocks. Business Management Assignment Help, Business Management Homework help, Business Management Study Help, Business Management Course Help