Which of the Following Statements Is False

question 43

Multiple Choice

Which of the following statements is false?

• A) One key result of applying the Capital Asset Pricing Model is that the risk and return of an individual security should be analyzed by how that security affects the risk and return of the portfolio in which it is held.
• B) According to the Capital Asset Pricing Model,investors are primarily concerned with portfolio risk,not the isolated risks of individual stocks.Thus,the relevant risk is an individual stock's contribution to the overall riskiness of the portfolio.
• C) The CAPM is built on expected conditions,although we are limited in most cases to using past data in applying it.Betas used in the CAPM which are calculated using historical data are always subject to changes in future volatility,and this is a limitation on the use of the CAPM.
• D) If the price of money increases due to greater anticipated inflation,the risk-free rate will reflect this fact.Although r_RF will increase,it is possible that the SML required rate of return for a stock will decrease because the market risk premium (r_M − r_RF)will decrease.(Assume that beta remains constant. )
• E) Any change in beta is likely to affect the required rate of return on a security which implies that a change in beta will likely have an impact on the security's price.

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Definitions:

Primary Liability

The obligation to pay a debt or fulfill a contractual obligation first, before any secondary parties are called upon.

Indorsers

Individuals who sign their names on the back of negotiable instruments, like checks or promissory notes, transferring their rights to another party.

Accommodation Maker

A person who signs a loan instrument to help someone obtain credit but who has no direct benefit from the loan.

Liable

Subject to legal obligation, where an individual or entity is responsible for fulfilling certain duties or compensating for harm caused to others.