Which of the following statements is CORRECT? (Assume that the risk- free rate is a constant.)
A)If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.
B) The effect of a change in the market risk premium depends on the slope of the yield curve.
C) If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.
D) If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.
E) The effect of a change in the market risk premium depends on the level of the risk-free rate.

Question

Which of the following statements is CORRECT? (Assume that the risk- free rate is a constant.)
A)If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.
B)	The effect of a change in the market risk premium depends on the slope of the yield curve.
C)	If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.
D)	If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.
E)	The effect of a change in the market risk premium depends on the level of the risk-free rate.

Quizplus · Accepted Answer

The required return on a stock is calculated using the Capital Asset Pricing Model (CAPM), which is affected by changes in the market risk premium. If the market risk premium increases by 1%, the required return will increase by 1% for a stock with a beta of 1.0, as the beta represents the stock's sensitivity to market movements.

Which of the Following Statements Is CORRECT? (Assume That the Risk-