Question

Out of the below options, what would likely cause the required rate of return on a stock to decline?

1. The risk free rate falls

2. The beta increases

3. The Expected Return on the Market increases

4. Corporate Bond Rates Increase

Answer 1

Answer: The risk free rate falls

Stocks are more risky than bonds, so if corporate bond rates increases, it means required rate of return on stock should increase.
According to capital asset pricing model:
Required rate of return= Risk free rate + Beta*(Expected Return on the Market - Risk free rate)
If beta increases, required return will increase.
If the expected return on the market increases, required return would also increase.
So, if the risk free rate falls required rate of return on a stock would decline.