The Security Market Line Can Be Used to Determine the Expected

question 20

Multiple Choice

The security market line can be used to determine the expected return on a security if we know the:

• A) unsystematic risk for the past three years
• B) systematic risk of that security for the next three years
• C) market risk premium at the end of the next year
• D) risk-free rate

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Definitions:

Normal Good

A good for which demand increases as the income of an individual increases, holding other factors constant.

Engel Curve

A graphical representation that shows the relationship between a consumer's income and their expenditure on a particular good, illustrating how consumption changes with income.

Utility Function

A representation of how consumer preferences over a set of goods and services are ordered, indicating the level of satisfaction derived from different bundles of goods.

Consumption

The action or process of using up goods and services, typically by households.