Which of the following statements is most correct?
A) We would observe a downward shift in the required returns of all stocks if investors believed that there would be deflation in the economy.
B) If investors became more risk averse, then the new security market line would have a steeper slope.
C) If the beta of a company doubles, then the required rate of return will also double.
D) Both statements a and b are correct.
E) All of the statements above are correct.

Question

Quizplus · Accepted Answer

If investors believe that there will be deflation in the economy, they will require a lower return on their investments to compensate for the expected decrease in the value of their money. This will lead to a downward shift in the required returns of all stocks. If investors become more risk averse, they will demand a higher return for taking on the same amount of risk. This will lead to a steeper slope for the new security market line.

Which of the Following Statements Is Most Correct