Final answer:
An increase in a stock's market risk, indicated by a higher beta, decreases its intrinsic value and results in higher required returns from investors due to the increased risk. The effect on expected future returns is uncertain and may depend on various market and company-specific factors.
option c is the correct
Step-by-step explanation:
When considering the intrinsic value of a stock, it's important to understand that an increase in its market risk, reflected in its beta, typically leads to a decrease in its intrinsic value. The beta of a stock is a measure of its volatility in relation to the market. An increase in market risk suggests that a stock's price may be more volatile and, as a result, potentially riskier. In response to higher risk, required returns will increase because investors will demand a higher rate of return to compensate for taking on additional risk.
The impact on expected future returns is uncertain because it depends on actual future market conditions, management decisions, and other factors that can't be perfectly predicted. However, generally, if investors perceive higher risk without an accompanying higher expected return, they may be less willing to invest, potentially decreasing the stock's price and expected returns. Moreover, increased market risk can lead to a higher discount rate applied when calculating the present discounted value, potentially further reducing the stock's intrinsic value.
In summary, an increase in market risk, leading to a higher beta, is likely to result in higher required returns by investors. The expected future returns may not necessarily increase and could potentially decrease or remain uncertain due to an array of contributing factors.