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.

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 stock will rise by 1%.

d. If the market risk premium increases by 1%, then the required return will increase 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 on the market risk premium depends on the level of the risk-free rate.

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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.
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 ...

Solution Summary

This solution is comprised of a detailed explanation to answer which of the following statements is correct. It determines which is correct and provides an example to explain the reason.

1. Risk- Free Rate
A stock has an expected return of 14 percent, a beta of 1.70, and the expected return on the market is 10 percent. What must the risk-free rate be?
Risk-Free Rate = ?
2. MarketRiskPremium
A stock has a beta of .8 and an expected return of 13 percent. If the risk-free rate is 4.5 percent, what is the

Analysts give Proctor & Gamble, the consumer products firm, an equity beta of 0.65. The risk-free rate is 4.0 percent. An analyst calculates an equity cost of capital for the firm of 7.9 percent using the capital asset pricing model (CAPM). What marketriskpremium is she assuming?

Assume that investors have recently become more risk averse, so the marketriskpremium has increased. Also, assume that the risk-free rate and expected inflation have not changed. Which of the following is most likely to occur?
- The required rate of return for an average stock (beta = 1) will increase by an amount equal to

If the slope of the security market line is 7% and the expected return on the market portfolio is 11%, the risk free rate is ___ % and the marketriskpremium is ____%.

You read in the Wall Street Journal that 30-day T-bills are currently yielding 5.55. your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums:
Inflation premium=3.25%
Liquidity premium=0.6%
Maturity riskpremium=1.8%
Default riskpremium=2.15%
On

Here are the inflation rates and U.S. stock market and Treasury bill returns between 1929 and 1933: 1929 Inflation=-2, Stock Market Return=-14.5, T-Bill Return=4.8. 1930: Inflation=-6.0, Stock Market Return=-28.3, T-Bill Return=2.4. 1931: -9.5, -43.9 and 1.1. 1932: -10.3, -9.9 and 1.0. 1933: .5, 57.3 and .3.
A. What was

A stock has a beta of 1.5, the marketriskpremium is 9%, and the risk-free rate is 5%.
a. What is the required rate of return on this stock?
b. What is the expected return on the market?
c. If based on your personal opinion the stock will generate a return of 20%, is the stock over-valued or under-valued? Would you buy or

A particular security's equilibrium rate of return is 8 percent. For all securities, the inflation riskpremium is 1.75 percent and the real interest rate is 3.5 percent. The security's liquidity riskpremium is .25 percent and maturity riskpremium is .85 percent. The security has no special covenants. Calculate the securit