Suppose that during the coming year,the risk free rate,r_RF,is expected to remain the same,while the market risk premium (r_M-r_RF),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 given by the Capital Asset Pricing Model (CAPM):$$r_i = r_{RF} + \beta_i * (r_M - r_{RF})$$where:* $r_i$ is the required return on stock $i$* $r_{RF}$ is the risk-free rate* $\beta_i$ is the beta of stock $i$* $r_M$ is the expected return on the marketIf the risk-free rate is expected to remain the same and the market risk premium is expected to fall, then the required return on all stocks will fall. However, the required return will fall more for stocks with higher betas because these stocks are more sensitive to changes in the market risk premium.

Suppose That During the Coming Year,the Risk Free Rate,rRF,is Expected

Suppose That During the Coming Year,the Risk Free Rate,r_RF,is Expected