Use the Information for the Question(s)below

question 1

Multiple Choice

Use the information for the question(s) below.
Tom's portfolio consists solely of an investment in Merck stock.Merck has an expected return of 13% and a volatility of 25%.The market portfolio has an expected return of 12% and a volatility of 18%.The risk-free rate is 4%.Assume that the CAPM assumptions hold in the market.
-Which of the following statements is FALSE?

• A)The risk premium of a security is equal to the market risk premium (the amount by which the market's expected return exceeds the risk-free rate),divided by the amount of market risk present in the security's returns measured by its beta with the market.
• B)We refer to the beta of a security with the market portfolio simply as the securities beta.
• C)There is a linear relationship between a stock's beta and its expected return.
• D)A security with a negative beta has a negative correlation with the market,which means that this security tends to perform well when the rest of the market is doing poorly.

---

Definitions:

Statistical Variation

The measure of how much data values in a statistical set differ from the average or mean value.

Profound Knowledge

Deep and comprehensive understanding in a particular field or subject, often driving innovative solutions or strategic insight.

Edwards Deming

An influential American engineer, statistician, and management consultant known for his work in quality management and improvement.

Real Processes

The actual procedures and tasks carried out to accomplish a specific goal in an organization, distinct from theoretical or idealized procedures.