Asked by Jesse Mad3329 on Jun 08, 2024
Verified
If the price of money (e.g.,interest rates and equity capital costs) increases due to an increase in anticipated inflation,the risk-free rate will also increase.If there is no change in investors' risk aversion,then the market risk premium (rM - rRF) will remain constant.Also,if there is no change in stocks' betas,then the required rate of return on each stock as measured by the CAPM will increase by the same amount as the increase in expected inflation.
Price of Money
Often refers to the interest rate, reflecting the cost of borrowing money or the return on savings, generally influenced by inflation, supply and demand for credit, and monetary policy.
Anticipated Inflation
Expected inflation, the general rise in prices forecasted by consumers, businesses, and investors, affecting economic decisions.
Market Risk Premium
The extra return expected by investors for holding a risky market portfolio instead of risk-free assets.
- Acknowledge the role of macroeconomic factors, such as inflation, on investment returns and the risk-free rate.
Verified Answer
NR
ninie rashidJun 12, 2024
Final Answer :
True
Explanation :
This statement is correct based on the CAPM formula where the required rate of return on a stock is equal to the risk-free rate plus the market risk premium multiplied by the beta of the stock. If there is an increase in the risk-free rate, then the required rate of return on a stock will increase by the same amount. And if there is no change in the market risk premium or stocks' betas, then the market risk premium and required rate of return on each stock will remain constant.
Learning Objectives
- Acknowledge the role of macroeconomic factors, such as inflation, on investment returns and the risk-free rate.