12. In an efficient market, the cost of equity for a risky firm does which one of the following according to the security market line? A. Produces a return that will be less than the market rate but higher than the risk-free rate B. Equals the market rate of return for all stocks C. Has a maximum cost equal to the market rate of return D. Decreases s the beta of the firm's stock increases E. Increases in direct relation to the stock's systematic risk 12. In an efficient market, the cost of equity for a risky firm does which one of the followingaccording to the security market line?A. Produces a return that will be less than the market rate but higher than the risk-free rateB. Equals the market rate of return for all stocksC. Has a maximum cost equal to the market rate of returnD. Decreases as the beta of the firm's stock increasesE. Increases in direct relation to the stock's systematic risk

An efficient market is the type of market in which all the information related to the financial…

Answered: In an efficient market, the cost of…

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter5: Risk Analysis

Section: Chapter Questions

Problem 11QE: Market equity beta measures the covariability of a firms returns with all shares traded on the...

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12. In an efficient market, the cost of equity for a risky firm does which one of the following according to the security market line? A. Produces a return that will be less than the market rate but higher than the risk-free rate B. Equals the market rate of return for all stocks C. Has a maximum cost equal to the market rate of return D. Decreases s the beta of the firm's stock increases E. Increases in direct relation to the stock's systematic risk

Definition Definition Degree to which financial markets incorporate all available information into the prices of assets. In a more efficient market, the prices reflect the available information more than that in a weak efficient market. It is difficult for investors to outperform the market in a strong efficient market. This is because all the available information is already discounted in the asset's price. However, in a weak-form efficiency, the market does not reflect all information in the asset's price. As a result, it becomes easier to generate better returns in a weak form or an inefficient market.

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