Using the Formula for the Security Market Line (Formula 21-7)

question 5

Multiple Choice

Using the formula for the security market line (Formula 21-7) , if the risk-free rate (R_F) is 6%, the market rate of return (K_M) is 12%, and the beta (b_i) is 1.2, compute the anticipated return for stock i (K_i) .

• A)20.4%
• B)16.33%
• C)13.64%
• D)13.4%
• E)13.2%

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Definitions:

Collection Fee

A charge assessed for the service of collecting delinquent payments on loans or bills.

Credit Card Sales

Credit card sales refer to transactions in which goods or services are purchased by customers using credit cards as the method of payment.

Cash Equivalents

Short-term, highly liquid investments with original maturities of three months or less, easily convertible into a known amount of cash.

Commercial Paper

An unsecured, short-term debt instrument issued by corporations, typically used for financing inventory and accounts receivable.