Systematic versus Unsystematic Risk [LO3] Indicate whether the following events might cause stocks in general to change price, and whether they might cause Big Widget Corp.’s stock to change price:
a. The government announces that inflation unexpectedly jumped by 2 percent last month.
b. Big Widget’s quarterly earnings report, just issued, generally fell in line with analysts’ expectations.
c. The government reports that
d. The directors of Big Widget die in a plane crash.
e. Congress approves changes to the tax code that will increase the top marginal corporate tax rate. The legislation had been debated for the previous six months.
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Fundamentals of Corporate Finance
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- Suppose that Federal Reserve actions have caused an increase in the risk-free rate, rRF. Meanwhile, investors are afraid of a recession, so the market risk premium, (rM − rRF), has increased. Under these conditions, with other things held constant, which of the following statements is most correct? a. The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0. b. Stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices. c. The prices of all stocks would decline, but the decline would be greatest for high-beta stocks. d. The prices of all stocks would increase, but the increase would be greatest for high-beta stocks. e. The required return on all stocks would increase by the same amount.arrow_forwardA stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. All else equal, which one of the following will lower the overall expected rate of return on this stock? A decrease in the probability of a recession occurring An increase in the rate of return in a recessionary economy A decrease in the probability of an economic boomarrow_forwardF1arrow_forward
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