Nile Foods' stock has a beta of 1.4, while Elba Eateries' stock has a beta of 0.7. Assume that the risk- free rate, rRF, is 5.5% and the market risk premium, (rM - rRF), equals 4%. Which of the following statements is correct?
A) If the risk-free rate increases but the market risk premium remains unchanged, the required return will increase for both stocks but the increase will be larger for Nile since it has a higher beta.
B) If the market risk premium increases but the risk-free rate remains unchanged, Nile's required return will increase because it has a beta greater than 1.0 but Elba's will decline because it has a beta less than 1.0.
C) Since Nile's beta is twice that of Elba's, its required rate of return will also be twice that of Elba's.
D) If the risk-free rate increases while the market risk premium remains constant, then the required return on an average stock will increase.

Question

Quizplus · Accepted Answer

The Answer of Nile Foods' stock has a beta of 1.4, while Elba Eateries' stock has a beta of 0.7. Assume that the risk- free rate, rRF, is 5.5% and the market risk premium, (rM - rRF), equals 4%. Which of the following statements is correct?
A) If the risk-free rate increases but the market risk premium remains unchanged, the required return will increase for both stocks but the increase will be larger for Nile since it has a higher beta.
B) If the market risk premium increases but the risk-free rate remains unchanged, Nile's required return will increase because it has a beta greater than 1.0 but Elba's will decline because it has a beta less than 1.0.
C) Since Nile's beta is twice that of Elba's, its required rate of return will also be twice that of Elba's.
D) If the risk-free rate increases while the market risk premium remains constant, then the required return on an average stock will increase.

Nile Foods' Stock Has a Beta of 1