Assume that investors have recently become more risk averse,so the market risk premium has increased.Also,assume that the risk-free rate and expected inflation have not changed.Which of the following is most likely to occur? A) The required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium. B) The required rate of return will decline for stocks whose betas are less than 1.0. C) The required rate of return on the market,r_M,will not change as a result of these changes. D) The required rate of return for each individual stock in the market will increase by an amount equal to the increase in the market risk premium. E) The required rate of return on a riskless bond will decline.

Question

Quizplus · Accepted Answer

When market risk premium increases, the required rate of return for all stocks in the market increases by the same amount. Therefore, choice A is the correct answer. The required rate of return on riskless bonds is not affected by changes in the market risk premium, which rules out choice E. The required rate of return for stocks with betas less than 1.0 may decline slightly, but not enough to offset the overall increase in the market risk premium, making choice B incorrect. Choice C is incorrect because the required rate of return on the market will increase along with the increase in the market risk premium, not remain stable. Finally, choice D is incorrect because the required rate of return for all stocks in the market will increase by the same amount, not individually.

Assume That Investors Have Recently Become More Risk Averse,so the Market