The Security Market Line (SML) Relates Risk to Return, for a Given

question 24

Multiple Choice

The Security Market Line (SML) relates risk to return, for a given set of financial market conditions.If investors conclude that the inflation rate is going to increase, which of the following changes would be most likely to occur?

• A)The market risk premium would increase.
• B)Beta would increase.
• C)The slope of the SML would increase.
• D)The required return of an average stock, rA = rM , would increase.
• E)None of the indicated changes would be likely to occur.

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Definitions:

Accounts Payable

Short-term liabilities representing amounts owed by a business to suppliers or creditors for goods and services purchased on credit.

Merchandise Inventory

The total value of a company's goods that are available for sale to customers.

Initial Purchase

The first acquisition of goods or assets for the purpose of business operations or investment.

F.O.B.

F.O.B. (Free on Board) is a shipping term used to indicate whether the seller or the buyer is liable for goods that are damaged or destroyed during shipping.