Which of the Following Statements Is Most Correct?
A) According $\beta$

question 50

Multiple Choice

Which of the following statements is most correct?

• A) According to CAPM theory, the required rate of return on a given stock can be found by use of the SML equation:
• R_i = r_RF + (r_M - r_RF)\(\beta\)_i
• Expectations for inflation are not reflected anywhere in this equation, even indirectly, and because of that the text notes that the CAPM may not be strictly correct.
• B) If the required rate of return is given by the SML equation as set forth in Answer a, there is nothing a financial manager can do to changer his or her company's cost of capital, because each of the elements in the equation is determined exclusively by the market, not by the type of actions a company's management can take, even in the long run.
• C) Assume that the required rate of return on the market is currently r_M = 15%, and that r_M remains fixed at that level. If the yield curve has a steep upward slope, the calculated market risk premium would be larger if the 30-day T-bill rate were used as the risk-free rate than if the 30-year T-bond rate were used as r_RF.
• D) Statements a and b are both true.
• E) Statements a and c are both true.

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Definitions:

High Reliability

A term used to describe organizations or systems with processes and structures in place that make them exceptionally consistent in accomplishing their goals and avoiding potentially catastrophic errors.

Predictive Validity

The degree to which a measurement or test score can forecast future success in a related activity or result.

Intelligence Quotient

A measure of a person's intellectual abilities in relation to their age group, commonly expressed as a score derived from standardized tests.

Sternberg

Refers to Robert Sternberg, an American psychologist known for his theory on intelligence, creativity, wisdom, and love.