Which of the following statements is CORRECT?
A) Beta is measured by the slope of the security market line.
B) If the risk-free rate rises, then the market risk premium must also rise.
C) If a company's beta is halved, then its required return will also be halved.
D) If a company's beta doubles, then its required return will also double.
E) The slope of the security market line is equal to the market risk premium, (rM − rRF).

Question

Quizplus · Accepted Answer

The statement that is correct is E - "The slope of the security market line is equal to the market risk premium, (rM − rRF)". A is incorrect because beta is measured by the slope of the security characteristic line, not the security market line. B is incorrect because a change in the risk-free rate does not necessarily mean a corresponding change in the market risk premium. C and D are incorrect because changes in a company's beta do not directly result in proportional changes in its required return.

Which of the Following Statements Is CORRECT