Question

Which of the following statements is/are INCORRECT? I. Beta measures a security's market risk, also known as systematic risk. II. SML is a graphical depiction of WACC model. III. If investors become more risk averse, the slope of SML will increase accordingly. IV. Other things being equal, a security's required rate of return doubles when its beta value doubles. V. Diversification will normally reduce the riskiness of a portfolio of securities. VI. Federal Reserve cuts an interest rate is considered as an example of non- systematic risk. VII. A stock with beta of -1 has zero market risk. 1) II, IV, VI and VII. 2) I, II, III, IV and V. 3) 11, 111 and V. 4) III, IV, V, VI and VII.

Answer 1

The Following Statments are Incorrect:-

II. SML is a graphical depiction of CAPM model rather than WACC model. Thus, the statment is Incorrect.

IV. When Beta of security doubles, the Market Risk Premium of the Security Doubles rather than Required rate of Return.

The formula for Required rate of Return = Risk-Free return + Beta of Stock(Market Risk Premium). Thus, the statment is Incorrect.

VI. Federal risk cuts an interest rate is considered as example of systematic risk rather Non-systematic risk. Thus, the statment is Incorrect.

VII. A Stock with Beta of zero has Zero Market Risk rather than a beta of -1. Thus, the statment is Incorrect.

Hence, Option 1. II,IV,VI.VII

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