Which of the Following Statements Is CORRECT

question 62

Multiple Choice

Which of the following statements is CORRECT?

• A) If investors become more risk averse but r_RF does not change, then the required rate of return on high-beta stocks will rise and the required return on low-beta stocks will decline, but the required return on an average-risk stock will not change.
• B) An investor who holds just one stock will generally be exposed to more risk than an investor who holds a portfolio of stocks, assuming the stocks are all equally risky.Since the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk.
• C) There is no reason to think that the slope of the yield curve would have any effect on the slope of the SML.
• D) Assume that the required rate of return on the market, r_M, is given and fixed at 10%.If the yield curve were upward sloping, then the Security Market Line (SML) would have a steeper slope if 1-year Treasury securities were used as the risk-free rate than if 30-year Treasury bonds were used for r_RF.
• E) If Mutual Fund A held equal amounts of 100 stocks, each of which had a beta of 1.0, and Mutual Fund B held equal amounts of 10 stocks with betas of 1.0, then the two mutual funds would both have betas of 1.0.Thus, they would be equally risky from an investor's standpoint, assuming the investor's only asset is one or the other of the mutual funds.

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Definitions:

Incremental Borrowing Rate

The interest rate a company would have to pay if it borrows money to finance a lease or purchase.

Actuarial Information

Data and analysis provided by actuaries, concerning the evaluation of financial risks, especially those related to insurance and pensions, using mathematics, statistics, and financial theories.

Capital Lease

A lease agreement that is classified as a purchase by the lessee for accounting purposes, allowing the lessee to benefit from asset depreciation and interest expense deductions.

Present Value

The current value of a future sum of money or stream of cash flows given a specified rate of return, often used in discounting cash flows.