Nile Foods' stock has a beta of 1.4, while Elbe Eateries' stock has a beta of 0.7. Assume that the risk-free rate, rRF, is 5.5% and the market risk premium, (rM - rRF), equals 4%. Which of the following statements is CORRECT?
(A) Since Nile's beta is twice that of Elbe's, its required rate of return will also be twice that of Elbe's.
(B) If the risk-free rate increases but the market risk premium remains unchanged, the required return will increase for both stocks but the increase will be larger for Nile since it has a higher beta.
(C) If the market risk premium increases but the risk-free rate remains unchanged, Nile's required return will increase because it has a beta greater than 1.0 but Elbe's will decline because it has a beta less than 1.0.
(D) If the market risk premium decreases but the risk-free rate remains unchanged, Nile's required return will decrease because it has a beta greater than 1.0 and Elbe's will also decrease, and by more than Nile's because it has a beta less than 1.0.
(E) If the risk-free rate increases while the market risk premium remains constant, then the required return on an average stock will increase.