The Security Market Line (SML) Relates Risk of Individual Securities

question 19

Multiple Choice

The Security Market Line (SML) relates risk of individual securities to their required rate of return. If investors conclude that the inflation rate is going to increase, which of the following change would occur?

• A) The market risk premium would increase.
• B) The beta of the stock would increase.
• C) The slope of the SML would become steeper.
• D) The standard deviation of the stock would increase.
• E) The required return of an average stock would increase.

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Definitions:

Net Water Movement

The overall transfer of water from one location to another, often across a membrane, driven by osmosis, filtration, or other forces.

Hypotonic

A term referring to a solution having an osmotic pressure (or solute concentration) less than that of the solution with which it is compared. Compare with hypertonic and isotonic.

Hypertonic

A solution that has a higher concentration of solutes compared to the solute concentration inside the cell, leading to the movement of water out of the cell.

Isotonic

A term applied to solutions that have identical concentrations of solute molecules and hence the same osmotic pressure. Compare with hypertonic and hypotonic.