Question

Which of the following statements is most correct? (Assume that the risk-free rate remains constant.) 3. If the market tisk premium increases by 1 percentage point, then the required return on all stocks will rise by 1 percentage point. b. the market risk premium increases by 1 percentage point, 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. c. the market risk premium increases by 1 percentage point, then the required return will increase by 1 percentage point for a stock that has a bela equal to 1.0. d. Statements and care correct. e. None of the statements above is correct. In the years shead the market risk premium. (kuku), is expected to fall, while the free rate, ka, is expected to remain at current levels. Given this forecast which of the following statements is most correct? The required return for all stocks will fall by the same amount. The age will fall for all stocks but will fall more for stocks with darbeta c. The mo r e will fall for all stocks but will fall less for stocks with .. . for socks with a be less than 10 and will

Answer 1

IV. Option c is correct

$r_{e} = r_{f} + \beta *(r_{m} - r_{f})$

If the beta = 1, then if market risk premium increases by 1 percentage point then the required rate of return also increases by 1 percentage point.

b is incorrect because if beta is less than 1 then the required rate of return increases by less than 1 percentage point.