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

ID: 2764242 • Letter: A

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?

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

If a stock has a negative beta, its required return must also be negative.

An index fund with beta = 1.0 should have a required return less than 11%.

If a stock's beta doubles, its required return must also double. An index fund with beta = 1.0 should have a required return greater than 11%.

Correct Response

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

Required Return=Rf+Beta*Mp=6+1*5=11%

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