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

Question

Quizplus · Accepted Answer

This statement is true. The cost of equity using the SML approach is based on the risk-free rate, the market risk premium, and the systematic risk of the firm as measured by its beta coefficient. If the amount of systematic risk decreases, the beta coefficient will decrease, which will lead to a decrease in the cost of equity.

A Decrease in the Amount of Systematic Risk Will Always