Question 1
As investors become ____ risk averse, the market risk premium ____ and SML becomes ____.
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more, increases, flatter
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more, decreases, steeper
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less, increases, steeper
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less, decreases, flatter
Question 2
Assume that in recent years both expected inflation and the market risk premium (rM– rRF) have declined. Assume also that all stocks have positive betas. Which of the following would be most likely to have occurred as a result of these changes?
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The required returns on all stocks would have fallen, but the fall would have been greater for stocks with higher betas.
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The required returns on all stocks would have fallen, but the decline would have been greater for stocks with lower betas.
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Required returns would have decreased for stocks with betas greater than 1.0, but would have increased for stocks with betas less than 1.0.
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The average required return on the market, rM, has remained constant, but the required returns have fallen for stocks that have betas greater than 1.0.
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