Which of the Following Statements Is Most Correct

question 11

Multiple Choice

Which of the following statements is most correct?

• A) If investors become more risk averse, but rRF remains constant, the required rate of return on high beta shares will rise, the required return on low beta shares will decline, but the required return on an average risk shares will not change.
• B) If Mutual Fund A held equal amounts of 100 shares, each of which had a beta of 1.0, and Mutual Fund B held equal amounts of 10 shares with betas of 1.0, then the two mutual funds would have betas of 1.0 and thus would be equally risky from an investor's standpoint.
• C) An investor who holds just one share will be exposed to more risk than an investor who holds a portfolio of shares, assuming the shares are all equally risky.Since the holder of the 1-share portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk.
• D) Assume that the required rate of return on the market , rM, is given and fixed.If the yield curve were upward-sloping, then the Security Market Line (SML) would have a steeper slope if 1-year Treasury securities were used as the risk-free rate than if 30-year Treasury bonds were used for rRF.
• E) Statements a, b, c, and d are all false.

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Definitions:

Loanable Funds

Money available for borrowing, which is determined by the savings in the economy plus the money provided by banks and other financial institutions.

Interest Rate

The requisition, as a percentage of the principal, placed by lenders on borrowers for asset use.

Macroeconomics

The study of economy-wide phenomena, including inflation, unemployment, and economic growth.

Consumption

The use of goods and services by households for personal needs or the process of using up resources or goods, leading to a decrease in their availability.