What Would You Recommend to an Investor Who Is Considering

question 55

Multiple Choice

What would you recommend to an investor who is considering an investment that, according to its Beta, plots below the security market line (SML) ?

• A)invest; return is high relative to risk
• B)don't invest; risk is high relative to return
• C)invest; stocks revert to the SML over time
• D)don't invest; stocks below the SML have too much unique risk

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Definitions:

Discounts Lost

The additional cost a company incurs for not taking advantage of early payment discounts offered by suppliers.

Net Method

An accounting method where discounts for early payment are assumed to be taken and purchase discounts are deducted from the cost of purchases.

Recording Purchases

The process of documenting the acquisition of goods or services in the financial records of an entity, impacting its inventory or expense accounts.

Periodic Inventory System

An accounting method that updates inventory levels and cost of goods sold at the end of an accounting period, not continuously.