Which of the following statements is correct? (Assume that the risk-free rate is a constant.)
A)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.
B)The effect of a change in the market risk premium depends on the slope of the yield curve.
C)If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.
D)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.

Question

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) formula is used to calculate the required return on equity, which is: Required Return = Risk-Free Rate + Beta * (Market Risk Premium). Therefore, if the market risk premium increases by 1%, the required return will increase by 1% for a stock with a beta of 1.0, as beta measures the stock's volatility in relation to the market.

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