Fundamentals of Financial Management Concise
Quiz 8: Risk and Rates of Return
If Investors Become Less Averse to Risk,the Slope of the Security
If investors become less averse to risk,the slope of the Security Market Line (SML)will increase.
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Most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets.The relevant risk of each asset should be measured in terms of its effect on the risk of the firm's stockholders.
Variance is a measure of the variability of returns,and since it involves squaring the deviation of each actual return from the expected return,it is always larger than its square root,the standard deviation.
Because of differences in the expected returns on different investments,the standard deviation is not always an adequate measure of risk.However,the coefficient of variation adjusts for differences in expected returns and thus allows investors to make better comparisons of investments' stand-alone risk.
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