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.

Question

Quizplus · Accepted Answer

The required return on a stock is calculated using the Capital Asset Pricing Model (CAPM), which states that the expected return on a stock equals the risk-free rate plus the stock's beta times the market risk premium. If the market risk premium increases by 1%, the required return on a stock with a beta of 1.0 will indeed increase by 1%, because the stock's return moves in lockstep with the market.

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