Which of the Following Statements Is Most Correct

question 86

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)bi.
• 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 Statement a, there is nothing a financial manager can do to change 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 true.
• E) Statements a and c are true.

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Definitions:

Analytical Measures

Techniques used to understand, interpret, and improve business performance through statistical and quantitative analysis.

Sound Judgment

The ability to make considered decisions or come to sensible conclusions.

Clean Audit Opinion

An auditor's report that states financial statements of a company are free from material misstatement and are presented fairly in accordance with the applicable financial reporting framework.

Unmodified Opinion

An auditor's report that concludes the financial statements of an entity present fairly its financial position, without any reservations.