Question

An increase in the treasury bill rate______ the required rate of return of a common stock?

A. Has no effect on
B. decreases
C. Increases
D. Cannot be determined by

Answer 1

An increase in the treasury bill rate increases the required rate of return of a common stock. The correct option is C. Increases

Step-by-step explanation:

An increase in the treasury bill rate increases the required rate of return of a common stock.

The required rate of return of a common stock is calculated using the risk-free rate as a benchmark. The risk-free rate is often represented by the treasury bill rate, which is the interest rate on short-term government bonds.

When the treasury bill rate increases, it indicates a higher level of risk-free return available in the market. Therefore, investors require a higher rate of return on their investments in common stocks to compensate for the increased risk. This leads to an increase in the required rate of return of a common stock. The correct option is C. Increases