Market Risk Premium
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Assume that investors have recently become more risk averse, so the market risk premium 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 the increase in the market risk premium.
- The required rate of return will decline for stocks whose betas are less than 1.0.
- The required rate of return on the market, rM, will not change as a result of these changes.
- The required rate of return for each individual stock in the market will increase by an amount equal to the increase in the market risk premium.
- The required rate of return on a riskless bond will decline
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