To determine: The reasons that supports that the investors should trade very rarely as per CAPM.
Introduction: CAPM is abbreviated as
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Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
- In the interest parity condition, why does the market exchange rate relate negatively to the interest rate?arrow_forwardAnswer the following: a. Explain why the interest parity condition must hold if the foreign exchange market is in equilibrium. b. Explain why overshooting occurs. What can the Central Bank do to mitigate its effects?arrow_forwardIs trading in an OTC market more risky for a trader than trading in an exchange? How so?arrow_forward
- Which of the following is not an argument for central bank intervention? Exchange rates are highly volatile. Exchange rate fluctuations have an adverse effect on the macroeconomy. The market knows better than economic policy makers what the appropriate level of the exchange rate is. Central bank intervention can smooth out fluctuations in exchange rates.arrow_forwardIn the interest parity condition, why does the exchange rate relate negatively to the interest rate?arrow_forwardWhich of the following is not an example of sovereign risk? a. Changes in tax rates b. Changes in currency denominations c. Changes in exchange rates d. Changes in regulationsarrow_forward
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- What is the difference between a currency hedger versus a currency speculatorarrow_forwardIn the Mundell-Fleming model with floating, exchange rates, explain what happens to aggregate income, the exchange rate, and the trade balance when the money supply is reduced. What would happen if exchange rates were fixed rather than floating?arrow_forwardWhy do companies with small profit margins have a smaller motivation to hedge against currency movements? Which industries (both specifically and the market form) are these to be most likely to be found it?arrow_forward