Based on the Security Market Line,Robo-Tech Stock Has a Required

question 111

Multiple Choice

Based on the security market line,Robo-Tech stock has a required return of 14% and Friendly Insurance Company has a required return of 10%.Robo-Tech has a standard deviation of returns of 18%.Therefore,

• A) Friendly must have a standard deviation of returns of less than 18% because Friendly is less risky than Robo-Tech.
• B) all rational investors will prefer Friendly over Robo-Tech.
• C) for a well-diversified investor, Friendly is less risky than Robo-Tech.
• D) the beta for Friendly must be greater than the beta for Robo-Tech because Friendly is the better buy for a risk-averse investor.

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Definitions:

Supply Function

A mathematical model that illustrates the relationship between the supply of a good or service and its price, holding other factors constant.

Production Function

An equation that describes the relationship between inputs and the maximum output that can be produced with those inputs.

Competitive Markets

Market structures characterized by a large number of buyers and sellers, where no single participant has the power to significantly influence prices.

Long-Run Supply Curve

A graphical representation showing the quantities of a good a supplier is willing to produce and sell at different prices over a long period, without fixed inputs.