Which of the following statements is CORRECT?
A) Portfolio diversification reduces the variability of returns on an individual stock.
B) Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihood of unfavorable events.
C) The SML relates a stock's required return to its market risk.The slope and intercept of this line cannot be controlled by the firms' managers, but managers can influence their firms' positions on the line by such actions as changing the firm's capital structure or the type of assets it employs.
D) A stock with a beta of −1.0 has zero market risk if held in a 1-stock portfolio.
E) When diversifiable risk has been diversified away, the inherent risk that remains is market risk, which is constant for all stocks in the market.

Question

Quizplus · Accepted Answer

The SML (Security Market Line) indeed relates a stock's required return to its market risk. While the slope (which represents the market risk premium) and intercept (risk-free rate) of the SML are determined by the market and cannot be directly controlled by a firm's managers, managers can influence their firm's position on the SML through decisions that affect the firm's risk and return characteristics, such as changes in capital structure or investment in different types of assets.

Which of the Following Statements Is CORRECT