In Contrast to the Baumol Model, the Miller-Orr Model

question 47

Multiple Choice

In contrast to the Baumol model, the Miller-Orr model:

• A)includes both cash inflows and outflows.
• B)assumes that the distribution of daily cash flows is normally distributed.
• C)allows the cash inflows and outflows to fluctuate randomly from day to day.
• D)on each day the net cash flow could be the expected value or some higher or lower value.
• E)All of the above.

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Definitions:

Security Market Line

A representation in the Capital Asset Pricing Model (CAPM) showing the relationship between the expected return of a security and its risk, measured by beta.

Marginal Tax Rate

The rate at which the next dollar of taxable income would be taxed, reflecting the percentage taken by taxes in the next higher tax bracket.

SML Approach

It refers to the Security Market Line approach, a graphical representation of the Capital Asset Pricing Model (CAPM) that shows the relationship between expected return and beta (market risk).

Reward-to-Risk Ratio

A metric used in finance to compare the expected returns of an investment to the amount of risk undertaken to capture these returns.