Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)
A) The effect of a change in the market risk premium depends on the slope of the yield curve.
B) If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.
C) If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.
D) The effect of a change in the market risk premium depends on the level of the risk-free rate.
E) If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.

Question

Quizplus · Accepted Answer

According to the Capital Asset Pricing Model (CAPM), the required return on a stock is equal to the risk-free rate plus the market risk premium multiplied by the stock's beta. Therefore, if the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0. The other choices are incorrect. The slope of the yield curve and the level of the risk-free rate may affect the required return, but they are not directly related to the market risk premium. The required return will not necessarily increase by 1% for all stocks, as it depends on the individual stock's beta. Lastly, the direction of the required return change for stocks with different betas is not known based on the information provided.

Which of the Following Statements Is CORRECT? (Assume That the Risk-Free