The Security Market Line Depicts the Graphical Relationship Between Which

question 37

Multiple Choice

The security market line depicts the graphical relationship between which two of the following?
I. expected return
II. surprise return
III. systematic risk
IV. unsystematic risk

• A) I and III
• B) I and IV
• C) II and III
• D) II and IV
• E) none of the above

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Definitions:

Cost of Equity

The return a company requires to decide if an investment meets capital return requirements, often used to assess the cost of funding projects.

Pre-Tax Cost

The expense incurred by a company or individual before taxes are deducted.

Levered Value

The value of an investment or company including debt, reflecting its total worth in a leveraged state.

Cost of Equity

The rate of return that a company must generate on equity-financed projects to retain its market value, reflecting the compensation investors expect for their risk.