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Question
The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, rM - rRF, is positive. Which of the following statements is CORRECT?
a. Stock B's required rate of return is twice that of Stock A.
b. If Stock A's required return is 11%, then the market risk premium is 5%.
c. If Stock B's required return is 11%, then the market risk premium is 5%.
d. If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's.
e. If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's.
Answer
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