Multiple Choice
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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 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.
B. The required returns on all stocks have fallen by the same amount.
C. The required returns on all stocks have fallen, but the decline has been greater for stocks with higher betas.
D. The required returns on all stocks have fallen, but the decline has been greater for stocks with lower betas.
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.
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The solution explains the correct alternative in the problem relating to stock returns
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C. The required returns on all stocks have fallen, but the decline has ...
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