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which one is true which one is false,why? If the return is riskless and never deviates...

which one is true which one is false,why?

If the return is riskless and never deviates from its mean, the variance is equal to one.

If the current stock price were greater than P0 = , it would be a positive NPV investment, and we would expect investors to rush in and buy it, driving up the stocks price.

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Answer #1

If the return is riskless and never deviates from its mean, the variance is equal to one.

The variance of returns of a stock M is given by

As the Return never deviates from the mean, all the returns are the same as that of the mean , so there is no deviation from the mean ever, So, from the formula , it can be seen that the variance will be 0

Hence the 1st statement is false.

If the current stock price were greater than P0 = , it would be a positive NPV investment, and we would expect investors to rush in and buy it, driving up the stocks price.

The Intrinsic value of stock is determined as P0., and if the current stock price is greater than this value, then the investment will be negative NPV, and hence the investors will stay away from the stock and its less demand will drive its price down

Hence the 2nd statement is also false.

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