____ in the beta coefficient normally causes____ in the required return and therefore ____ in the price of the stock, all else remaining the same.
A. An increase, an increase, an increase
B. An increase, a decrease, an increase
C. An increase, an increase, an decrease
D. A decrease, a decrease, a decrease
C. An increase, an increase, an decrease.
A. An increase, an increase, an increase
To determine the correct answer, we need to understand the relationship between the beta coefficient, required return, and the price of the stock.
The beta coefficient measures the sensitivity of a stock's price to changes in the overall market. A beta coefficient greater than 1 indicates that the stock is more volatile than the market, while a beta coefficient less than 1 suggests the stock is less volatile.
Now, let's consider the options given:
A. An increase in the beta coefficient normally causes an increase in the required return and therefore an increase in the price of the stock, all else remaining the same.
B. An increase in the beta coefficient normally causes a decrease in the required return and therefore an increase in the price of the stock, all else remaining the same.
C. An increase in the beta coefficient normally causes an increase in the required return and therefore a decrease in the price of the stock, all else remaining the same.
D. A decrease in the beta coefficient normally causes a decrease in the required return and therefore a decrease in the price of the stock, all else remaining the same.
To determine the correct answer, we need to consider the relationship between the beta coefficient and the required return. Generally, a higher beta coefficient indicates higher risk, which leads to a higher required return. On the other hand, a lower beta coefficient suggests lower risk and therefore a lower required return.
Additionally, the relationship between the required return and the price of the stock is inverse. As the required return increases, the price of the stock decreases, assuming all other factors remain constant.
Based on this understanding, the correct answer is:
C. An increase in the beta coefficient normally causes an increase in the required return and therefore a decrease in the price of the stock, all else remaining the same.
When the beta coefficient increases, it indicates that the stock has become more volatile, which leads to an increase in the required return. Consequently, a higher required return reduces the price of the stock.