Which of the Following Statements Is CORRECT

question 1

Multiple Choice

Which of the following statements is CORRECT?

• A) Richard Roll has argued that it is possible to test the CAPM to see if it is correct.
• B) Tests have shown that the risk/return relationship appears to be linear, but the slope of the relationship is greater than that predicted by the CAPM.
• C) Tests have shown that the betas of individual stocks are stable over time, but that the betas of large portfolios are much less stable.
• D) The most widely cited study of the validity of the CAPM is one performed by Modigliani and Miller.
• E) Tests have shown that the betas of individual stocks are unstable over time, but that the betas of large portfolios are reasonably stable over time.

---

Definitions:

Capital Investment

Funds invested in a business by owners or shareholders for the purpose of furthering its objectives, often used to acquire assets or improve operations.

Capital Budgeting

The process of planning and managing a company's long-term investments in projects or assets to maximize profitability and growth.

Capital Investment Analysis

The process of evaluating and selecting long-term investments consistent with the firm's goal of wealth maximization.

Cash Payback Period

the duration required to recover the cost of an investment through cash flows generated by the investment.