Which of the Following Statements Is Most Correct

question 51

Multiple Choice

Which of the following statements is most correct?

• A)According to CAPM theory, the required rate of return on a given stock can be found by use of the SML equation:
• Ri = rRF + (rM − rRF)βi
• Expectations for inflation are not reflected anywhere in this equation, even indirectly, and because of that the text notes that the CAPM may not be strictly correct.
• B)If the required rate of return is given by the SML equation as set forth in Answer a, there is nothing a financial manager can do to changer his or her company's cost of capital, because each of the elements in the equation is determined exclusively by the market, not by the type of actions a company's management can take, even in the long run.
• C)Assume that the required rate of return on the market is currently rM = 15%, and that rM remains fixed at that level.If the yield curve has a steep upward slope, the calculated market risk premium would be larger if the 30-day T-bill rate were used as the risk-free rate than if the 30-year T-bond rate were used as rRF.
• D)Statements a and b are both true.
• E)Statements a and c are both true.

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Definitions:

Equal Annual Withdrawals

Regular, identical amounts of money withdrawn from an investment or savings account over a designated period.

Annuity Due

An annuity due is a series of payments made at the beginning of each period in the cycle, such as monthly rent payments, as opposed to at the end of the period.

Present Value

The current value of a future sum of money or stream of cash flows, given a specified rate of return.

Compound Interest

The addition of interest to the principal sum of a loan or deposit, where the interest that has been added also earns interest.