Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

Which of the following best describes the Capital Market Line (CML) in the context of investments in securities?

It illustrates the relationship between a security's expected return and its beta with the market.

It shows the efficient frontier of all risky assets without including the risk-free asset.

It is a graphical representation of the time value of money.

It represents the set of portfolios that optimally combine risk-free assets and the market portfolio, showing the highest expected return for a given level of risk.

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Verified step by step guidance

Understand the concept of the Capital Market Line (CML): The CML is a graphical representation in portfolio theory that shows the relationship between risk (standard deviation) and expected return for portfolios that combine a risk-free asset and the market portfolio.

Recognize the components of the CML: The CML includes the risk-free rate (a fixed return with no risk) and the market portfolio (a portfolio of all risky assets in the market). It represents the optimal risk-return trade-off.

Identify the formula for the CML: The equation for the CML is given as: \( E(R_p) = R_f + \frac{E(R_m) - R_f}{\sigma_m} \cdot \sigma_p \), where \( E(R_p) \) is the expected return of the portfolio, \( R_f \) is the risk-free rate, \( E(R_m) \) is the expected return of the market portfolio, \( \sigma_m \) is the standard deviation of the market portfolio, and \( \sigma_p \) is the standard deviation of the portfolio.

Compare the CML to other concepts: The CML differs from the Security Market Line (SML), which relates a security's expected return to its beta (systematic risk). The CML focuses on total risk (standard deviation) rather than beta.

Conclude the correct description: The CML represents the set of portfolios that optimally combine risk-free assets and the market portfolio, showing the highest expected return for a given level of risk. This aligns with the correct answer provided in the problem.