Draw the SML and Plot Asset C Such That It

question 16

Essay

Draw the SML and plot asset C such that it has less risk than the market but plots above the SML,and asset D such that it has more risk than the market and plots below the SML. (Be sure to indicate where the market portfolio is on your graph.) Explain how assets like C or D can plot as they do and explain why such pricing cannot persist in a market that is in equilibrium.

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Definitions:

Net Sales

The amount of sales generated by a company after deductions for returns, allowances for damaged or missing goods, and discounts.

Dividend Yield Ratio

A financial ratio that indicates how much a company pays out in dividends each year relative to its share price.

Cash Dividends

Payments made by a corporation to its shareholders from earnings, typically in the form of cash.

Market Price

The existing rate at which an asset or service is traded in the open market.