Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)
A. If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.
B. The effect of a change in the market risk premium depends on the slope of the yield curve.
C. If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.
D. If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.
E. The effect of a change in the market risk premium depends on the level of the risk-free rate.
Answer: D
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