risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, rM − rRF, is positive Which of the following statements is CORRECT?
A) Stock B's required rate of return is twice that of Stock A.
B) If Stock A's required return is 11%, then the market risk premium is 5%.
C) If Stock B's required return is 11%, then the market risk premium is 5%.
D) If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's.
E) If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's.

Question

Quizplus · Accepted Answer

The required return for Stock A is calculated using the CAPM formula: rA = rRF + betaA * (rM - rRF). If Stock A's required return is 11%, then 11% = 6% + 1.0 * (rM - rRF), which implies the market risk premium is 5%.

Risk-Free Rate Is 6%; Stock a Has a Beta of 1.0;