Question

True or False Questions:

1.Portfolio diversification is accomplished through the covariances of the securities in the portfolio.

2.The difference between the market return and the risk-free rate is known as the market risk premium and is the slope of the Security Market Line.

3.The security market line is a graphical representation of the total risk and expected returns of assets.

4. Both preferred stock and common stock are considered equity securities; however, preferred stock has a higher priority of claim on the firm’s earnings and assets than does common stock.

5.According to the Fisher Effect, the ex post real rate of interest is the nominal risk-free rate of interest minus actual inflation.

6.The cash flows that common shareholders receive are referred to as coupons payments.

7.If the return required by shareholders increases, then the price of a stock will decrease, other things held constant.

8. You can create a riskless two-stock portfolio is you have two stocks that are perfectly negatively correlated.

9. Diversification can be thought of as the process of spreading your money over many different assets.

10. Suppose a company fell on hard times and withheld the payment of dividends to both preferred and common shareholders, then later decided to reinstitute the payment of dividends. The company cannot pay a dividend to common shareholders without first paying dividends to preferred shareholders.

Answer #1

**1]**

False.

Portfolio diversification is accomplished through the correlations of the securities in the portfolio.

**2]**

True.

The difference between the market return and the risk-free rate is known as the market risk premium and is the slope of the Security Market Line.

**3]**

False.

The security market line is a graphical representation of the systematic risk and expected returns of assets.

**4]**

True.

Both preferred stock and common stock are considered equity securities; however, preferred stock has a higher priority of claim on the firm’s earnings and assets than does common stock.

1. True/ False ?
a) Diversification reduces the market risk of a portfolio.
b) For a given level of expected returns, the primary goal of
investors is to minimize the beta of their portfolio.
c) In an MM world, WACC equals the return on assets.
d) After-tax WACC should be used as a discount rate for a firm’s
average project.

Capital markets in Flatland exhibit trade in four securities,
the stocks X, Y, and Z, and a riskless government security.
Evaluated at current prices in U.S. dollars, the total market
values of these assets are, respectively, $24 billion, $36 billion,
$24 billion, and $16 billion. (6 pts.)
Determine the relative proportions of each asset in the market
portfolio.
If an investor holds risky assets in proportion to their market
values and divides their aggregate portfolio of $100,000 with
$30,000 invested...

True or False Questions:
Free cash flow calculation is possible using only the data in
the Cash Flow Statement.
If you are interested in a company’s ability to meet its
short-term obligations, you should calculate its equity
multiplier.
Beta is an appropriate measure of risk when the investor holds
an efficiently diversified (or well-diversified) portfolio.
Assume that Stock A has a standard deviation of 0.20 and Stock B
has a standard deviation of 0.15. It is possible for Stock B...

Find the standard deviation of a portfolio made up of 50% Stock
A and 50% Stock B
Stock
Expected Return
Beta
Standard Deviation
Correlation Coefficient ρ A,B
A
12%
1.3
0.26
0.7
B
13%
1.4
0.25
A firm falls on hard times and with no payment of dividends to
both preferred and common shareholders, they later chose to
reinstitute the payment of dividends. Is it true that the firm
cannot pay a dividend to common shareholders without first paying
dividends...

You have a portfolio with 60% allocation of funds to the market
portfolio and remaining amount is allocated to a risk-free asset.
The beta of your portfolio is _____ .
a.
0
b.
0.6
c.
1
d.
1.5
Which of the following statements is false?
a.
SML is the graphical representation of expected return-beta
relationship of the CAPM.
b.
Slope of SML is the market risk premium.
c.
Alpha is the abnormal rate of return on a security in excess...

1. The
risk-free rate of interest is 2%. Stock AAA has a beta
of 1.4 and a standard deviation of return = .40. The
expected return on the market portfolio is 9%. Assume CAPM
holds. (Note: the questions below are
independent not sequential.)a) Plot
the security market line. Label all axes of your
graph. Plot (and label) the points (and numerical
values) corresponding to the market portfolio, the
risk-free asset, and stock AAA.b) Your
current wealth is $1,000. What is the expected
returnfor a portfolio where youborrow$500 at the risk-free...

35. Assume the expected return on the market portfolio is 15%
and its standard deviation is 12%. The risk-free rate is 5%. Denote
the expected return and beta of securities on the Security Market
Line
(SML) with () and β, respectively. Which statement is
TRUE?
A) The beta of a CML portfolio that contain 150% of the market
portfolio and 50% borrowed money
is 1.25.
B) The SML can be represented by the following equation:
C) The slope of the...

true or false:
1. in general, the normal or quoted interest rate is composed
of the risk free rate plus a premium that reflects the sickness of
the then security.
2. in an efficient market the intrinsic value and the market
price of a stock are the same.
3. common stocks and preferred stocks are the same except
preferred stocks do not have voting rights.
no
more information is added.

A portfolio consists
of the following securities. What is the portfolio weight of stock
C?
Stock
#Shares
PPS
A
200
$
48
B
150
$
33
C
350
$
21
Multiple Choice
0.336
0.557
0.445
0.451
0.389
The risk-free rate is
3.5 percent. What is the expected risk premium on this security
given the following information?
State of the
Economy
Probability
E(R)
Boom
0.30
15
%
Normal
0.55
8
%
Recession
0.20
-11
%
Multiple Choice
2.09 percent
4.15 percent...

A form of short-term borrowing by dealers in government
securities is (are)
brokers' calls.
repurchase agreements (Repos).
reserve requirements.
bankers' acceptances.
commercial paper.
The material wealth of a society is a function of
all financial and real assets.
all physical assets.
all real assets.
all financial assets.
The interest rate charged by banks with excess reserves at a
Federal Reserve Bank to banks needing overnight loans to meet
reserve requirements is called the
discount rate.
federal funds rate.
money market...

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