Question

iii. In the years ahead the market risk premium, (km - krF), is expected to fall, while the risk-free rate, kry, is expected to remain at current levels. Given this forecast, which of the following statements is most correct? a. The required return for all stocks will fall by the same amount. b. The required return will fall for all stocks but will fall more for stocks with higher betas. c. The required return will fall for all stocks but will fall less for stocks with higher betas. d. 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. The required return on all stocks will remain unchanged.

Answer 1

Required return = Rf + beta(Rm-Rf)

so if Rm-Rf = risk premium decreases then , return on all stocks will fall but beta will play crucial role

higher the value of beta, higher will be the decrease in the value of required return of stock

So correct option : The required return will fall for all stocks but will fall more for stocks with higher betas

Answer : b (Thumbs up please)