Which of the Following Statements Is Most Correct

question 71

Multiple Choice

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 portfolio's expected return would be a weighted average of the stocks' expected returns, but the portfolio's standard deviation would probably be greater than the average of the stocks' standard deviations.
• D) If investors became more averse to risk, then (1) the slope of the SML would increase and (2) the required rate of return on low-beta stocks would increase by more than the required return on high-beta stocks.
• E) The CAPM has been thoroughly tested, and the theory has been confirmed beyond any reasonable doubt.

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Definitions:

Cause-and-Effect Relationships

The relationship in which one condition or event (cause) directly leads to another condition or event (effect).

Disadvantage

A condition or situation that makes it more difficult for someone or something to succeed or achieve a goal.

Weightlessness

The condition experienced when there is no perceivable gravitational force acting on a body, often occurring in space or during free-fall.

Circulatory Function

The role or process of circulating blood and lymph through the body, facilitated by the heart and blood vessels, to transport nutrients and remove waste.