Answer:
b. False
Question: As a general rule, a company’s debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured. True False
Answer:
True
Question: Under the CAPM, the required rate of return on a firm’s common stock is determined only by the firm’s market risk. If its market risk is known, and if that risk is expected to remain constant, then analysts have all the information they need to calculate the firm’s required rate of return.
Answer Options:
a. True
b. False
Answer:
b. False
Question: If a retired individual lives on his or her investment income, then it would make sense for this person to prefer stocks with high payouts so he or she could receive cash without going to the trouble and expense of selling stocks. On the other hand, it would make sense for an individual who would just reinvest any dividends received to prefer a low-payout company because that would save him or her taxes and brokerage costs.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Under the CAPM, the required rate of return on a firm’s common stock is determined only by the firm’s market risk. If its market risk is known, and if that risk is expected to remain constant, then analysts have all the information they need to calculate the firm’s required rate of return. a. True b. False
Answer:
a
Question: The text identifies three methods for estimating the cost of common stock from retained earnings: the CAPM method, the DCF method, and the bond-yield-plus-risk-premium method. However, only the DCF method is widely used in practice. a. True b. False
Answer:
b. False
Question: The slope of the SML is determined by investors’ aversion to risk. The greater the average investor’s risk aversion, the steeper the SML. a. True b. False
Answer:
a
Question: Since the market return represents the expected return on an average stock, the market return reflects a certain amount of risk. As a result, there exists a market risk premium, which is the amount over and above the risk-free rate that is required to compensate stock investors for assuming an average amount of risk.
Answer Options:
a. True
b. False
Answer:
a. True
Question: The text identifies three methods for estimating the cost of common stock from retained earnings: the CAPM method, the DCF method, and the bond-yield-plus-risk-premium method. However, only the CAPM method always provides an accurate and reliable estimate. a. True b. False
Answer:
b. False
Question: Which of the following statements is CORRECT?
Answer Options:
a. While the distinctions are becoming blurred, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.
b. The NYSE operates as an auction market, whereas NASDAQ is an example of a dealer market.
c. Money market mutual funds usually invest their money in a well-diversified portfolio of liquid common stocks.
d. Money markets are markets for long-term debt and common stocks.
e. A liquid security is a security whose value is derived from the price of some other “underlying” asset.
Answer:
b. The NYSE operates as an auction market, whereas NASDAQ is an example of a dealer market.
Question: Is it possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm is negative. a. True b. False
Answer:
a
Question: The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, an increase in the tax rate on dividends relative to that on capital gains would logically lead to an increase in dividend payout ratios.
Answer Options:
a. True
b. False
Answer:
b. False
Question: The SML relates required returns to firms’ systematic (or market) risk. The slope and intercept of this line can be influenced by a manager’s actions.
Answer Options:
a. True
b. False
Answer:
b. False
Question: A stock’s beta measures its diversifiable risk relative to the diversifiable risks of other firms. a. True b. False
Answer:
b. False
Question: A stock’s beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio. a. True b. False
Answer:
b. False
Question: If you plotted the returns of a company against those of the market and found that the slope of your line was negative, the CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue in the future. a. True b. False
Answer:
b
Question: Because of differences in the expected returns on different investments, the standard deviation is not always an adequate measure of risk. However, the coefficient of variation adjusts for differences in expected returns and thus allows investors to make better comparisons of investments’ stand-alone risk. a. True b. False
Answer:
a. True
Question: When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio’s risk. a. True b. False
Answer:
b. False
Question: A stock’s beta measures its diversifiable risk relative to the diversifiable risks of other firms. a. True b. False
Answer:
b. False
Question: The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero, which is the risk-free rate.
Answer Options:
a. True
b. False
Answer:
a. True
Question: If you plotted the returns on a given stock against those of the market, and if you found that the slope of the regression line was negative, the CAPM would indicate that the required rate of return on the stock should be greater than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue into the future. a. True b. False
Answer:
b
Question: If the returns of two firms are negatively correlated, then one of them must have a negative beta. a. True b. False
Answer:
b. False
Question: Because of differences in the expected returns on different investments, the standard deviation is not always an adequate measure of risk. However, the coefficient of variation adjusts for differences in expected returns and thus allows investors to make better comparisons of investments’ stand-alone risk. a. True b. False
Answer:
a
Question: We would generally find that the beta of a single security is more stable over time than the beta of a diversified portfolio.
Answer Options:
a. True
b. False
Answer:
b. False