If an annual rate of return on U.S. Treasury bill is historically low, investors expect the return on the stock market to be: Multiple Choice considerably lower than normal. approximately equal to zero. above the bond market return high. about average.
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- Assume that inflation is expected to steadily increase in the years ahead, but that the real risk-free rate r*, is expected to remain constant. Which of the following statements is most correct? None of the answers are correct. The treasury yield curve must be upward sloping. If the expectations theory holds, the treasury yield curve must be downward sloping. If the expectations theory holds, the yield curve for corporate securities must be downward sloping.For the cost of equity (stock) is it better to use the current US Treasury bill rate or a longer-termgovernment bond rate as the risk-free rate of return?Does the rate you use as the risk-free rate have an impact on what market premium might beappropriate? Historically, large-company stocks have earned an average return of 12.1% per annum, while US Treasury bills and long-term government bonds have earned average returns of 3.5% and5.9% respectively.Suppose that Federal Reserve actions have caused an increase in the risk-free rate, rRF. Meanwhile, investors are afraid of a recession, so the market risk premium, (rM - rRF), has increased. Under these conditions, with other things held constant, which of the following statements is most correct and why? A. The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0. B. The prices of all stocks would decline, but the decline would be greatest for the highest-beta stocks. C. The prices of all stocks would increase, but the increase would be greatest for the highest-beta stocks. D. The required return on all stocks would increase by the same amount.
- Suppose that Federal Reserve actions have caused an increase in the risk-free rate, rRF. Meanwhile, investors are afraid of a recession, so the market risk premium, (rM − rRF), has increased. Under these conditions, with other things held constant, which of the following statements is most correct? a. The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0. b. Stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices. c. The prices of all stocks would decline, but the decline would be greatest for high-beta stocks. d. The prices of all stocks would increase, but the increase would be greatest for high-beta stocks. e. The required return on all stocks would increase by the same amount.Assume the following: The real risk-free rate, r*, is expected to remain constant at 3%. Inflation is expected to be 3% next year and then to be constant at 2% a year thereafter. The maturity risk premium is zero. Given this information, which of the following statements is CORRECT? a. A 5-year corporate bond must have a lower yield than a 7-year Treasury security. b. The yield curve for U.S. Treasury securities will be upward sloping. c. A 5-year corporate bond must have a lower yield than a 5-year Treasury security. d. The real risk-free rate cannot be constant if inflation is not expected to remain constant. e. This problem assumed a zero maturity risk premium, but that is probably not valid in the real world.The real risk-free rate is 2.70%, inflation is expected to be 3.45% this year, and the maturity risk premium is zero. Ignoring any cross-product terms, i.e., if averaging is required, use the arithmetic average, what is the equilibrium rate of return on a 1-year Treasury bond? Please explain process and show calculations
- Which of the following statements is true? If investors believe inflation will be subsiding in the future, the prevailing yield curve will have a positive slope. The longer the maturity of a security, the greater its interest rate risk. The interest rate risk premium always adds a downward bias to the slope of the yield curve. The real rate of interest varies with the business cycle, with the lowest rates at the end of a period of business expansion and the highest at the bottom of a recession.Use the data in the tables below to answer the following questions: Average rates of return on Treasury bills, government bonds, and common stocks, 1900–2020. Portfolio Average Annual Rate of Return (%) Average Premium (Extra return versus Treasury bills) (%) Treasury bills 3.7 Treasury bonds 5.4 1.7 Common stocks 11.5 7.8 Standard deviation of returns, 1900–2020. Portfolio Standard Deviation (%) Treasury bills 2.8 Long-term government bonds 8.9 Common stocks 19.5 What was the average rate of return on large U.S. common stocks from 1900 to 2020? What was the average risk premium on large stocks? What was the standard deviation of returns on common stocks? Note: Enter your answer as a percent rounded to 1 decimal place.Assume the average return on utility stocks was 8.9% over the past 40 years. �If the average return on Treasury bills was 3.8% over that period, what is the historical risk premium for utility stocks?
- The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates. Based on the pure expectations theory, is the following statement true or false? The pure expectations theory assumes that investors do not consider long-term bonds to be riskier than short-term bonds. True False The yield on a one-year Treasury security is 4.6900%, and the two-year Treasury security has a 6.3315% yield. Assuming that the pure expectations theory is correct, what is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) 10.1585% 7.9988% 6.799% 9.1186% Recall that on a one-year Treasury security the yield is 4.6900% and 6.3315% on a two-year Treasury security. Suppose the one-year security does not have a maturity risk premium, but the two-year security does and it is 0.5%. What is…2) Historically, stocks have delivered a ________ return on average compared to Treasury bills but have experienced ________ fluctuations in values. A) higher, higherB) higher, lowerC) lower, higherD) lower, lowerUnder the liquidity preference theory, if inflation is expected to be falling over the next few years, long-term interest rates will be higher than short-term rates. True/false/uncertain? Why?