CAPM Theory Indicates That

question 4

Multiple Choice

CAPM theory indicates that:

• A)Combining several firms under one owner may offset specific risk, but has no effect on systematic risk
• B)A diversified portfolio should only be undertaken by corporate finance specialists
• C)Spreading risk through diversification may benefit only stakeholders other than shareholders
• D)A and c above

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Definitions:

Long-run Equilibrium

A state in which, given enough time for all adjustments to be made, there is no incentive for firms to enter or exit an industry, and prices stabilize.

Marginal Revenue

The extra income a business earns by selling an additional unit of a product or service.

Marginal Cost

The elevated cost associated with manufacturing an additional unit of a product or service.

Competitive Firm

A company that operates in a market where it competes against other firms for market share and customers.