Which of the following statements is Correct? a. The slope of the SML is determi

Question

Which of the following statements is Correct?
a. The slope of the SML is determined by the value of beta
b. The SML shows the relationship between companies' required returns and their diversifiable rrisks. The slope and intercept of this line cannot be influenced by a firms managers, but the position of the company on the line can be influenced by its managers.
c. Suppose you plotted the return of a given stock against those of the market, and you found that the slope of the regression line was negative. The CAPM would indicate that the required rate of retunr on the stock shouldbe less than the risk-free rate for a well diversified investor, assuming investors expect the observed relationship to continue on into the future.
d. If investors become less risk averse, the slope of the Security Market Line will increase
e. If a company increases its use of debt, this is likely to cause the slope of its SML to increase, indicting a higher required return on the stock.

Explanation / Answer

A and D are definitely wrong. The slope is R(M) - R(RF), and if investors become less ris averse, then the slope of the market security line will DECREASE. Out of the remaining options, C seems the most right to me. The slope of the regression line is beta (and negative), so the required return would be less than the risk-free rate.

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.