Suppose that during the coming year, the risk free rate, rRF, is expected to remain the same, while the market risk premium (rM − rRF), is expected to fall Given this forecast, which of the following statements is CORRECT?
A) The required return on all stocks will remain unchanged.
B) The required return will fall for all stocks, but it will fall more for stocks with higher betas.
C) The required return for all stocks will fall by the same amount.
D) The required return will fall for all stocks, but it will fall less for stocks with higher betas.
E) The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0.

Question

Quizplus · Accepted Answer

The required return on a stock is calculated using the formula: required return = rRF + beta * (rM - rRF). If the market risk premium (rM - rRF) falls, the required return will decrease more for stocks with higher betas, as the impact of the change in the market risk premium is multiplied by the beta.

Suppose That During the Coming Year, the Risk Free Rate