The Standard CAPM Implies

question 17

Multiple Choice

The standard CAPM implies:

• A) investors are compensated for all risk they take.
• B) investors are compensated for all market risk they take.
• C) portfolio diversification does not matter.
• D) high-return investments have higher variances than low-return investments.

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Definitions:

Return On Equity

A gauge of corporate profitability that indicates the profit made from the investments of its shareholders.

Return On Assets

A financial ratio that indicates the percentage of profit a company earns in relation to its overall resources. It demonstrates how effectively a company is using its assets to generate earnings.

Average Collection Period

A measure of the average number of days it takes a company to collect payments from its credit sales.

Du Pont Analysis

A method of performance measurement that breaks down return on equity into three component parts: profit margin, asset turnover, and financial leverage.