Question

Which of the following statements is/are incorrect? 1) A security's beta measures its market risk. 2) If investors become less risk averse, the slope of SML will decrease accordingly. 3) The tighter the probability distribution of its expected future return, the greater risk of a given investment as measured by its standard deviation. 4) SML is a graphical depiction of CAPM?

Answer #1

All the statement except statement 3 are true.

This is because the tighter the probability distribution of its expected future return, the greater risk of a given instrument is not measured by standard deviation,it is measured by its expected rate of return through the probability analysis.

rest of the statements are true because the beta measures the systematic risk which is also known as the market risk, and SML is a graphical depiction of CAPM.

Show the answer would be statement ( 3).

QUESTION 17
Which of the following statements is most correct?
a. An increase in expected inflation could be expected to
increase the required return on a riskless asset and on an average
stock by the same amount, other things held constant.
b. A graph of the SML would show required rates of return on the
vertical axis and standard deviations of returns on the horizontal
axis.
c. If two "normal" or "typical" stocks were combined to form a
2-stock portfolio,...

The security market line (SML) is an equation that shows the
relationship between risk as measured by beta and the required
rates of return on individual securities. The SML equation is given
below:
If a stock's expected return plots on or above the SML, then the
stock's return is -Select-insufficientsufficientCorrect 1 of Item 1
to compensate the investor for risk. If a stock's expected return
plots below the SML, the stock's return is
-Select-insufficientsufficientCorrect 2 of Item 1 to...

Risk and Rates of Return: Security Market Line The security
market line (SML) is an equation that shows the relationship
between risk as measured by beta and the required rates of return
on individual securities. The SML equation is given below:
If a stock's expected return plots on or above the SML, then the
stock's return is (Pick one: sufficent /
insufficient) to compensate the investor for risk. If
a stock's expected return plots below the SML, the stock's...

10. Select all which is true
a) Most investors are risk averse, since for a given increase in
return they require an increase in risk.
b) The coefficient of variation is important for evaluating the
risk of a security held in a portfolio.
c) Adding an asset to a portfolio that is perfectly positively
correlated with existing portfolio returns will have no effect on
portfolio risk.
d) Diversifiable risk is the only risk that influences the
required return because nondiversifiable...

Assume that CAPM holds. Which of the following statements is
TRUE?
a)Beta indicates a stock’s diversifiable risk
b)Two stocks with the same stand-alone risk must have the same
betas
c)The slope of the security market line is given by the market
risk premium
d)If the beta of a Stock doubles, then its required rate of
return must also double
e)If the risk-free rate decreases, then the market risk premium
must also decrease

Assume that the risk-free rate, Upper R Subscript Upper F, is
currently 9%, the market return, r Subscript m, is 13 %, and
asset A has a beta, b Subscript Upper A, of 1.39. a. Use CAPM to
estimate the required return, r Subscript Upper A, on asset A.
Which of the following graphs represents the security market line
(SML) and the required return for asset A?
b. Assume that as a result of recent economic events,
inflationary expectations have...

Which of the following statements about the beta coefficient is
false?
A
A stock’s beta coefficient measures its volatility relative to
the market portfolio.
B
A stock’s beta coefficient can be estimated by plotting the
stock’s returns versus the market portfolio’s returns.
C
A stock’s reported beta coefficient is based on forecasted
future volatility.
D
A stock with a beta coefficient greater than 1.0 is said to be
riskier than the market portfolio.
E
Using the capital asset pricing model,...

Shifts in the security market line Assume that the risk-free
rate, Upper R Subscript Upper F, is currently 9%, the market
return, r Subscript m, is 13 %, and asset A has a beta, b
Subscript Upper A, of 1.39. a. Use CAPM to estimate the required
return, r Subscript Upper A, on asset A. Which of the following
graphs represents the security market line (SML) and the required
return for asset A? b. Assume that as a result of...

Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the
following statements must be true, assuming the CAPM is
correct.
a. Stock A would be a more desirable addition to a portfolio
then Stock B.
b. Stock B would be a more desirable addition to a portfolio
than A.
c. When held in isolation, Stock A has more risk than Stock
B.
d. In equilibrium, the expected return on Stock B will be
greater than that...

Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the
following statements must be true, assuming the CAPM is
correct.
a.
Stock A would be a more desirable addition to a portfolio then
Stock B.
b.
In equilibrium, the expected return on Stock B will be greater
than that on Stock A.
c.
When held in isolation, Stock A has more risk than Stock B.
d.
Stock B would be a more desirable addition to a...

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