Assume that the risk-free rate is 6% and the market risk premium is 5%. Given th

Question

Assume that the risk-free rate is 6% and the market risk premium is 5%. Given this information, which of the following statements is CORRECT? a)An index fund with beta = 1.0 should have a required return of 11%. b)If a stock has a negative beta, its required return must also be negative. c)An index fund with beta = 1.0 should have a required return less than 11%. d)If a stock's beta doubles, its required return must also double. e)An index fund with beta = 1.0 should have a required return greater than 11%.

Explanation / Answer

=1

re=rf+(rm-rf)*

= 6 + (5)*1

= 11%

hence a)An index fund with beta = 1.0 should have a required return of 11%.

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