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

Question

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.

Quizplus · Accepted Answer

The required return on a stock is calculated using the Capital Asset Pricing Model (CAPM), which includes the market risk premium. If the market risk premium declines, the required return on a stock with beta < 1.0 will decline, as the stock is less sensitive to market changes.

Assume That the Risk-Free Rate Remains Constant, but the Market