Assume That Investors Become Increasingly Risk Averse, So That the Market

Multiple Choice

Assume that investors become increasingly risk averse, so that the market risk premium increases. Also, assume that the risk-free rate and expected inflation remain the same. Which of the following is most likely to occur?

A) The required rate of return will decline for stocks that have betas less than 1.0.
B) The required rate of return on the market, rM will remain the same.
C) The required rate of return for each stock in the market will increase by an amount equal to the increase in the market risk premium.
D) Answers a and b are correct.
E) None of the statements above is correct.