Based on the Security Market Line,Robo-Tech Stock Has a Required

question 111

Multiple Choice

Based on the security market line,Robo-Tech stock has a required return of 14% and Friendly Insurance Company has a required return of 10%.Robo-Tech has a standard deviation of returns of 18%.Therefore,

• A) Friendly must have a standard deviation of returns of less than 18% because Friendly is less risky than Robo-Tech.
• B) all rational investors will prefer Friendly over Robo-Tech.
• C) for a well-diversified investor, Friendly is less risky than Robo-Tech.
• D) the beta for Friendly must be greater than the beta for Robo-Tech because Friendly is the better buy for a risk-averse investor.

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Definitions:

Bank Loan

A sum of money borrowed from a bank that needs to be repaid with interest.

Accrual

An accounting method that records revenues and expenses when they are incurred, regardless of when cash transactions occur.

Spontaneous Financing

Financing that arises naturally from the normal operations of a company, such as trade credit that increases automatically with increases in sales.

Accrued Depreciation

The total amount of depreciation expense that has been charged against a fixed asset since it was put into use, contributing to its reduced book value.