During the coming year,the market risk premium (r_M - r_RF),is expected to fall,while the risk-free rate,r_RF,is expected to remain the same.Given this forecast,which of the following statements is CORRECT? A) The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0. B) The required return on all stocks will remain unchanged. C) The required return will fall for all stocks,but it will fall more for stocks with higher betas. D) The required return for all stocks will fall by the same amount. E) The required return will fall for all stocks,but it will fall less for stocks with higher betas.

Question

Quizplus · Accepted Answer

The required return on stocks is determined by the Capital Asset Pricing Model (CAPM), which states that the expected return on a stock equals the risk-free rate plus the product of the stock's beta and the market risk premium. If the market risk premium falls while the risk-free rate remains the same, the required return on all stocks will decrease. However, since the market risk premium is multiplied by the stock's beta in the CAPM formula, stocks with higher betas will see a larger decrease in their required return.

During the Coming Year,the Market Risk Premium (RM - RRF),is

During the Coming Year,the Market Risk Premium (R_M - R_RF),is