Question

Which of the following is TRUE?
Select one:
a. The correlation coefficient is an index of the degree of movement of an asset's return in response to a change in the risk-free asset return.
b. The capital asset pricing model (CAPM) links together unsystematic risk and return for all assets.
c. The security market line is not stable over time and shifts over time in response to changing inflationary expectations.
d. The CAPM uses standard deviation to relate an asset's risk relative to the market to the asset's required return.

hich of the following is a reason that makes NPV a better approach to capital budgeting on a purely theoretical basis?
Select one:
a. It measures the benefits relative to the amount invested.
b. Financial decision makers are inclined to higher rates of return.
c. Interest rates are expressed as annual rates of return.
d. It measures the direct impact on investors’ wealth (value created).

Please Solve As soon as
Thank's
Abdul-Rahim Taysir

Answer 1

Q1) C) The security market line is not stable over time, and shifts over time in response to changing inflationary expectations.

Explanation: As there is an increase or decrease in inflation, the required return of the asset calculated using CAPM model changes, and accordingly leads to shift of sml.

Q2) D) It measures the direct impact on investors wealth (value created)

Explanation: Npv takes into consideration a realistic reinvestment rate and time value of money, which helps to calculate the actual impact on the wealth of the investors.