Assume that in recent years both expected inflation and the market risk premium
ID: 2356608 • Letter: A
Question
Assume that in recent years both expected inflation and the market risk premium (rM ? rRF) have declined. Assume also that all stocks have positive betas. Which of the following would be most likely to have occurred as a result of these changes? a The required returns on all stocks have fallen, but the decline has been greater for stocks with lower betas. b The required returns on all stocks have fallen, but the fall has been greater for stocks with higher betas. c The average required return on the market, rM, has remained constant, but the required returns have fallen for stocks that have betas greater than 1.0. d Required returns have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0. e The required returns on all stocks have fallen by the same amount.Explanation / Answer
E. The required returns have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0.