5. Martinez is looking at the positions of the four stocks (a, b, c, and d in blue) that he is considering on the Security Market Line (SML) as below. When he is a risk-averse and highly rational investor, which stock is he supposed to purchase among the four stocks? Answer: [ ] Asset expected return (E(R)) E(R) R ER-R Asset Au=10 beta 6. The whole notion of a cost of capital is ultimately based around an investor's opportunity cost. Investors can move so freely between stocks and other asset classes now. Gold has a compounded return rate of 13.1% over the last 10 years, compared to the S&P 500's compounded annual growth rate of 2.1%. Assuming that we all agreed on the above, which of the following sounds reasonable? Answer: [ ] a. Investors would be content with 2.1% of return on their investment in funding companies b. Gold market is likely to have a higher market premium than stock market does c. The higher investor's opportunity cost is, the lower companies' WACC d. Investment in gold looks safer and more lucrative than in stocks 8. SolBridge corporation's total value is now $40million and is tax-exempt. And assume any debt proceeds are used to repurchase equity. If the company sells $18.4 million in debt, the firm value will a. increase b. decrease c. be the same d. be unpredictable 4. In the universe of investment, risks are usually classified into two types; one is systematic risk and the other unsystematic one. However, a prominent theory says that in the efficient market, investors are only rewarded for systematic risk, because unsystematic risk can be eliminated by. What is the best word for the blank? Answer: [ ] a. mutual fund b. derivatives c. diversification d. Treasury Bonds