Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant. )
A) If the market risk premium increases by 1%,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.
B) The effect of a change in the market risk premium depends on the slope of the yield curve.
C) If the market risk premium increases by 1%,then the required return on all stocks will rise by 1%.
D) If the market risk premium increases by 1%,then the required return will increase by 1% for a stock that has a beta of 1.0.
E) The effect of a change in the market risk premium depends on the level of the risk-free rate.

Question

Quizplus · Accepted Answer

The required return on a stock is calculated using the Capital Asset Pricing Model (CAPM), which is given by the formula: Required Return = Risk-Free Rate + Beta * (Market Risk Premium). Therefore, if the market risk premium increases by 1%, the required return will increase by exactly 1% for a stock with a beta of 1.0, since the stock's return moves in lockstep with the market.

Which of the Following Statements Is CORRECT? (Assume That the Risk-Free