Which of the Following Statements Is Most Correct?
A) According $\beta$

question 61

Multiple Choice

Which of the following statements is most correct?

• A) According to CAPM theory, the required rate of return on a given share can be found by use of the SML equation:
• Ri = rRF + (rM - rRF) (\(\beta\)). i
• 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 Answer a, there is nothing a financial manager can do to changer 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 both true.
• E) Statements a and c are both true.

---

Definitions:

Inflation Rate

The rate at which the general level of prices for goods and services is rising, thereby eroding purchasing power.

Reducing Inflation

Measures and policies implemented to decrease the rate at which the general level of prices for goods and services is rising.

Debt-to-Income Ratio

A financial measure that compares an individual's total debt to their total gross income, often used by lenders to assess borrowing risk.

Inflation Rate

The rate at which the general level of prices for goods and services is rising, eroding purchasing power.