If an Asset Has a Risk-Return Combination That Is Above

question 89

Multiple Choice

If an asset has a risk-return combination that is above the Security Market Line (SML) , then arbitrage will make that asset's

• A) beta increase.
• B) beta decrease.
• C) average expected return increase.
• D) average expected return decrease.

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Definitions:

Market Capitalization Rate

The expected return on an investment in the market, often used in the valuation of stocks and to determine a company's cost of equity.

PVGO

Present Value of Growth Opportunities; a model that estimates the value of a firm's shares excluding its current earnings, focusing on future growth.

P/E Ratio

Price-to-earnings ratio, a valuation metric for determining the relative worth of a company's shares by dividing stock price by earnings per share.

Cost of Equity

The return that investors require for investing in a company's equity, reflecting the risk of the investment.