Answer:
b. False
Question: If expectations for long-term inflation rose, but the slope of the SML remained constant, this would have a greater impact on the required rate of return on equity, rs, than on the interest rate on long-term debt, rd, for most firms. Therefore, the percentage point increase in the cost of equity would be greater than the increase in the interest rate on long-term debt. 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.
Answer Options:
a. True
b. False
Answer:
a. True
Question: There is an inverse relationship between bonds’ quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower. True False
Answer:
True
Question: Which of the following statements is CORRECT? a. The total return on a bond during a given year is based only on the coupon interest payments received. b. All else equal, a bond that has a coupon rate of 10% will sell at a discount if the required return for bonds of similar risk is 8%. c. The price of a discount bond will increase over time, assuming that the bond’s yield to maturity remains constant. d. For a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds. e. When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized.
Answer Options:
a. The total return on a bond during a given year is based only on the coupon interest payments received.
b. All else equal, a bond that has a coupon rate of 10% will sell at a discount if the required return for bonds of similar risk is 8%.
c. The price of a discount bond will increase over time, assuming that the bond’s yield to maturity remains constant.
d. For a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds.
e. When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized.
Answer:
c
Question: We would generally find that the beta of a single security is more stable over time than the beta of a diversified portfolio. a. True b. False
Answer:
b
Question: The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, if the tax rate on dividends is high relative to that on capital gains, then individuals with low taxable incomes should favor stocks with low payouts and high-income individuals should favor high-payout companies.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Variance is a measure of the variability of returns, and since it involves squaring the deviation of each actual return from the expected return, it is always larger than its square root, the standard deviation. 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 DCF method is widely used in practice. a. True b. False
Answer:
b. False
Question: Diversification will normally reduce the riskiness of a portfolio of stocks. a. True b. False
Answer:
a. True
Question: A stock with a beta equal to –1.0 has zero systematic (or market) risk.
Answer Options:
a. True
b. False
Answer:
b. False
Question: A portfolio’s risk is measured by the weighted average of the standard deviations of the securities in the portfolio. It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.
Answer Options:
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
Question: If investors become less averse to risk, the slope of the Security Market Line (SML) will increase. a. True b. False
Answer:
b
Question: Portfolio A has but one security, while Portfolio B has 100 securities. Because of diversification effects, we would expect Portfolio B to have the lower risk. However, it is possible for Portfolio A to be less risky. a. True b. False
Answer:
a
Question: If an investor buys enough stocks, he or she can, through diversification, eliminate all of the market risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all diversifiable risk. a. True b. False
Answer:
b
Question: In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are really interested in ex ante (future) data. a. True b. False
Answer:
a. True