A decrease in the reward for bearing systematic risk will always decrease a ﬁrm's cost of equity,
when calculated using the SML approach.

Question

Quizplus · Accepted Answer

According to the SML approach, a decrease in the reward for bearing systematic risk (i.e., the market risk premium) will lead to a lower cost of equity for a firm. This is because the cost of equity is calculated as the risk-free rate plus a premium for bearing systematic risk, and a smaller premium will result in a lower cost of equity. Therefore, the statement is true.

A Decrease in the Reward for Bearing Systematic Risk Will