Return to a risk-free rate of 3.0 percent. Now suppose the government announces substantial changes to the tax code. The uncertainty causes investors to become more risk averse, and the market risk premium [R(Ry) - RF] increases from 3.0 to 4.0 percent (the risk-free rate remains the same). Assuming the expected returns of the ten stocks do not change, what is the stocks should MSI now buy?

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When the market risk premium increases due to investor risk aversion the expected return on all risk... View the full answer