You read in the Financial Times that the equity risk premium has increased overnight from 5.5% to 6.5%. Which of the following statements is least likely to be correct?Group of answer choicesThe market return is higher than the risk-free rateInvestors’ risk aversion has increasedThe beta of the market has increasedThe SML has a steeper slope
Question
You read in the Financial Times that the equity risk premium has increased overnight from 5.5% to 6.5%. Which of the following statements is least likely to be correct?Group of answer choicesThe market return is higher than the risk-free rateInvestors’ risk aversion has increasedThe beta of the market has increasedThe SML has a steeper slope
Solution
The statement that is least likely to be correct is "The beta of the market has increased."
The beta of the market is always 1, as it is used as a benchmark to measure the risk of other investments. Therefore, it does not change with changes in the equity risk premium.
The other statements are more likely to be correct:
- The market return is higher than the risk-free rate: This is generally true as the equity risk premium is the excess return that investing in the stock market provides over a risk-free rate.
- Investors’ risk aversion has increased: An increase in the equity risk premium could indicate that investors are demanding a higher return for taking on additional risk, suggesting increased risk aversion.
- The SML (Security Market Line) has a steeper slope: The slope of the SML is determined by the equity risk premium. If the equity risk premium increases, the slope of the SML becomes steeper.
Similar Questions
. Referring to the same information as in question 4:Which of the following statements is not true?The total risk of the stock is reflected in its standard deviationThe systematic or non-diversifiable risk is reflected in betaThe market risk premium is 8%The firm’s risk premium is 12%The market has a beta of 1.5
Assume that the risk-free rate remains constant, but that the market risk premium (Rm-rf) declines. Which of the following is likely to occur?Group of answer choicesThe required return on a share with a beta = 1.0 will increaseThe required return on a share with a beta > 1.0 will increase.The required return on a share with a beta < 1.0 will decreaseThe required return on a share with a beta > 1.0 will declineThe required return on a share with a beta = 1.0 will remain the same.
1. Which of the following statements regarding risk-averse investors is true?a.They accept investments that are fair games.b.They only care about the rate of return.c.They are willing to accept lower returns and high risk.d.They only accept risky investments that offer risk premiums over the risk-free rate.
Multiple Choice QuestionOne type of risk that investors in stock take is a decrease in Blank______.Multiple choice question.valueavailable creditcampaigns by the companyinterest rate
Which statement is correct regarding the following information? - Shares in company A have an expected return of 8%, standard deviation of 15% and beta coefficient of 1.3- Shares in company B have an expected return of 12%, standard deviation of 25% and beta coefficient of -0.75.Group of answer choicesIn a single asset portfolio, security A would be riskier because its coefficient of variation is higher than security B.In a single asset portfolio, security B would be riskier because its coefficient of variation is higher than security ASecurity A is less risky if held in a diversified portfolio because of its positive correlation with market portfolioSecurity B is riskier if held in a diversified portfolio because of its beta coefficient of –0.75None of the options is correct.
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.