An increase in the beta of a firm indicates , and, all else being the same, results in .
A) an increase in risk; a higher required rate of return and hence a lower share price.
B) a decrease in risk; a higher required rate of return and hence a lower share price.
C) a decrease in risk; a lower required rate of return and hence a higher share price.
D) an increase in risk; a lower required rate of return and hence a higher share price.

Question

Quizplus · Accepted Answer

An increase in beta indicates higher systematic risk or market risk. This means that the stock's return is more sensitive to the overall stock market's fluctuations. As a result, investors demand a higher rate of return to compensate for the increased risk, leading to a lower share price. Therefore, choice A is the best answer.

An Increase in the Beta of a Firm Indicates