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

the decline has been greater for stocks with higher betas

Explanation:

Since both expected inflation and the market risk premium (rM – rRF) have declined it can be said that the decline has been greater for stocks with higher betas. This is because a stocks beta indicates the volatility of the stock in comparison with the rest of the market. A value of 1 indicates that it follows the rest of the market exactly, while higher numbers indicate more volatility. Since all the stocks have positive betas then it means they are either the same or more volatile, therefore if the market is in a decline then these stocks will decline the same or with even greater momentum.