Which of the Following Statements Is Correct

question 132

Multiple Choice

Which of the following statements is correct?

• A)A graph of the SML as applied to individual stocks would show required rates of return on the vertical axis and standard deviations of returns on the horizontal axis.
• B)The CAPM has been thoroughly tested, and the theory has been confirmed beyond any reasonable doubt.
• C)If investors become more risk averse, then (1) the slope of the SML would increase and (2) the required rate of return on low-beta stocks would increase by more than the required return on high-beta stocks.
• D)An increase in expected inflation, combined with a constant real risk-free rate and a constant market risk premium, would lead to identical increases in the required return on a riskless asset and on an average stock, other things held constant.

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Definitions:

Break-Even Lease Payment

The lease payment at which the cost of leasing equals the benefits received, with no net loss or gain from entering into the lease.

Cost of Debt

The effective rate that a company pays on its total debt, representing the interest expense on all outstanding debts.

Marginal Tax Rates

The rate of additional federal income tax that applies to each additional dollar of taxable income, indicating the percentage of tax applied to your income for each tax bracket in which you qualify.

Straight-Line Depreciation

A method of allocating the cost of a fixed asset evenly over its useful life.