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Assume that the risk-free rate, rRF, declines but the market risk premium, (rM rRF) increases, with ...

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Assume that the risk-free rate, rRF, declines but the market risk premium, (rM rRF) increases, with ...

Assume that the risk-free rate, r_RF, declines but the market risk premium, (r_M– r_RF) increases, with the net effect being that the overall required return on the market, r_M, remains constant. Which of the following statements is correct?

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The required return of all stocks will decrease by the amount of the decrease in the risk-free rate.

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The required return will increase for stocks that have a beta less than 1.0 but will decline for stocks that have a beta greater than 1.0.

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The required return will decline for stocks that have a beta less than 1.0 but increase for stocks that have a beta greater than 1.0.

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Since the overall return on the market stays constant, the required return on each individual stock will remain constant.

Textbook

Financial Management: Theory and Practice

Edition: 4^th

Authors: Brigham, Ehrhardt, Gessaroli, Nason

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