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:

Accounts Receivable Turnover

A financial ratio indicating how quickly a company collects on outstanding accounts receivable, calculated by dividing total net sales by the average accounts receivable during a period.

Cash Cycle

The amount of time it takes for a company to convert its investments in inventory back into cash through sales.

Inventory Turnover Rate

A metric that shows how many times a company's inventory is sold and replaced over a certain period of time.

Cost of Goods Sold

The direct costs attributable to the production of the goods sold by a company, including the cost of materials and labor.