Question

Which of the following statements is CORRECT? a. Two securities with the same stand-alone risk must have the same betas. b. A stock's beta indicates its diversifiable risk. c. Diversifiable risk cannot be completely diversified away. d. Lower beta stocks have higher required returns.

Answer 1

Answer:

E. The slope of the security market line is equal to the market risk premium

Explanation:

Option A is incorrect because the equity beta is different of two securities though it has same risk level this is because the beta equity is affected by the gearing of the firm

Option B is also incorrect because the beta reflects the risk that is un-diversifiable. Always remember that Capital asset pricing model says that the investor are compensated for the risk that is un-diversifiable which is the business systematic risk.

Option C is also incorrect because the diversifiable risk can be diversified completely by investing in stock of companies of more than 40 industries.

Option D is also incorrect because the lower beta shows lower risk level of the investment and higher risk level indicates higher risk levels.

Option E is correct because the slope indicates the risk premium on the investment and the intercept indicates the risk free investment.