Which of the Following Statements Regarding Errors in the CAPM

question 19

Multiple Choice

Which of the following statements regarding errors in the CAPM inputs is (are) true?

• A)Errors in equity premium estimates tend to be large and have a significant influence on the resultant hurdle rates.
• B)Errors in the risk-free rate tend to be insignificant.
• C)Errors in market-beta estimates tend to be modest.
• D)All of the above statements are true.

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Definitions:

Contract Interest Rate

The interest rate specified in a loan agreement or contract, typically fixed for the life of the loan.

Face Value

The nominal value or dollar value of a security stated by the issuer, also known as par value, especially relevant for bonds and stock certificates.

Market Rate

The prevailing interest rate available in the marketplace on investments or loans, subject to changes based on supply and demand and economic conditions.

Discount

A reduction from the usual cost of something, often used to encourage sales or purchases.