Assume that the risk-free rate remains constant,but the market risk premium declines.Which of the following is most likely to occur?
A)The required return on a stock with beta greater than 1.0 will increase.
B)The return on the market will remain constant.
C)The return on the market will increase.
D)The required return on a stock with beta less than 1.0 will decline.

Question

Quizplus · Accepted Answer

The required return on a stock with beta less than 1.0 will decline because as the market risk premium declines, the required return on all stocks decreases. Since stocks with beta less than 1.0 are less risky than the market, they have a lower required return and will benefit from the decline in market risk premium.

Assume That the Risk-Free Rate Remains Constant,but the Market Risk