In efficient markets, the rate of return on a stock should be: A. always greater than the risk-free rate B. Less than zero C. Related to the systemic risk of the stock D. Zero; no stock should earn a positive return
Q: If investors’ aversion to risk increased, would the risk premium on a high-beta stockincrease by…
A: Beta could be a degree of the volatility of a stock compared with the general market. The market,…
Q: d. Suppose a new stock, C, with f = 18% and b = 2.0, becomes avail- able. Is this stock in…
A: Beta is calculated by slope function in excel with market return as known x and stock return as…
Q: If there is a stock which is substantially overvalued, where it should plot relatively to the SML?…
A: SML or Security Market Line:- It is an graphical representation of CAPM model. SML graph is being…
Q: Which of the following events are likely to increase the market value of a calloption on a common…
A: The question is based on the concept of valuation of call option. The value of call option is…
Q: Fill in the blanks: Stock returns can be explained by the stock's and the stock's A. beta; market…
A: stock return cam be calculated using Capital asset pricing model or dividend discount model.
Q: Which of the following statements is most accurate in analyzing a stock? If the expected return…
A:
Q: In the short run (i.e., a static viewpoint), stock price reflects the weighted average opinions of…
A: The first three statements reflect an Efficient market hypothesis. This states that no single…
Q: The small firm effect refers to the observed tendency for stock prices to behave in a manner that is…
A: The small firm effect: In the financial markets, the small firm effect refers to the phenomenon that…
Q: theory, whenever investors find that the required return of stock is less than the expected return…
A: Price of stock depends on required rate of return and expected return they must be equal to equity…
Q: tock price volatility makes stock options less valuable because of risk aversion O True O False
A: Stock option can be bought with very little premium to be paid.
Q: According to the efficient market hypothesis:a. High-beta stocks are consistently overpriced.b.…
A: Efficient market hypothesis: The efficient market hypothesis is a kind of hypothesis in which the…
Q: Which of the following is/are true about the Efficient Markets Hypothesis (EMH) I.The required rate…
A: EMH : STATES THAT THE STOCKS ARE TRADED AT FAIR VALUE AND IT IS IMPOSSIBLE TO BEAT THE MARKET.
Q: If Stock A has a lower expected return than Stock B, which of the following statements is least…
A: Beta is a measure of systematic risk for the company or security. It is the risk measure to show to…
Q: Which of the following does NOT correctly complete this sentence: In general, the link between an…
A: Due to the spread of the information and availability of public and private information the stock…
Q: Which of the following is true for testing stock price predictability? Select one: O a. All of the…
A: Answer- Option (A) = All the above options. The forecast of the stock market is the act of trying…
Q: If investors’ aversion to risk increased, would the risk premium on a high-beta stock increase by…
A: Aversion to risk is essentially the decision to not take more risk Beta of the stock specifies the…
Q: What should be the risk premium and return on a stock with a Beta of zero under the Capital Asset…
A: "Since you have asked multiple questions, we will solve the first question for you . If you want any…
Q: “If the business cycle is predictable, and a stock has a positive beta, the stock’s returns also…
A: Beta is a measure of risk in the stock market. Beta is calculated as the co-variance of asset return…
Q: If the expected rate of return on a stock is less than its required rate of return, investors will…
A: The expected return on the stock is compared with the required return on that stock to identify over…
Q: According to the Capital Asset Pricing Model (CAPM), risky stocks pay a risk premium based on their…
A: Answer: True Capital Asset Pricing Model is used to determine the expected return on a stock, which…
Q: A stock is in equilibrium if its required return v its expected return. In general, assume that…
A: In order to find whether the stock price is in equilibrium or not one can use CAPM also known as…
Q: Higher a stock’s volatility, why does the higher the probability of large increases or decreases in…
A: Stock Volatility: Volatility is defined as a statistical measure of the dispersion of the returns…
Q: Which of the following statements is CORRECT? Multiple Choice Company-specific risk can be…
A: The unsystematic risk is the company specific risk, the systematic risk is the vulnerability related…
Q: Which of the following statement is most accurate in analyzing a stock? If the security has a lower…
A: If Security has Intrinsic value < Current Price - Overvalued, SELL the share Intrinsic value…
Q: According to modern portfolio theory, the idea that investors with different indifference curves…
A: Option Explanation a. Separation Theorem is a theory that postulates that, given efficient capital…
Q: Is the following statement correct, wrong or partially correc? Why? "If the volatility of Stock A is…
A: This statement is CORRECT.
Q: An individual stock with a beta greater than 1.0 is a. Same as risky as the market b. Riskier that…
A: The beta of a security measures the riskiness of the stock with respect to the overall market. Since…
Q: Which of the following will (holding everything else constant) cause the price earnings (P/E) ratio…
A: The price to earning ratio is the ratio of current market price with respect to the earning per…
Q: an investment market, understanding the concept of undervalued and overvalued stocks is very…
A: Market rate of return is the rate of return which is prevailing in market for all financial…
Q: According to the theory of arbitrage:a. High-beta stocks are consistently overpriced.b. Low-beta…
A: Arbitrage pricing theory represents the relationship between risk and return. In the large capital…
Q: An optimal forecast made using rational expectations provides a certain rate of return for a stock.…
A: Since you have posted multiple questions, we will be solving only the first question as per the…
Q: 6. Which of the following statements is incorrect? A. The expected risk premium on each investment…
A: Note : We'll answer the first question since the exact one wasn't specified. Please submit a new…
Q: Which of the following statements is CORRECT? A stock's standard deviations is more relevant as a…
A: Market risk is reflecting of all such risks which can never be eliminated even through…
Q: Due to its risk characteristics compared to the ordinary preferred stock, cumalitive preferred…
A: Due to its risk characteristics compared to the ordinary preferred stock, cumulative preferred…
Q: Which of the following is/are true about the Efficient Markets Hypothesis (EMH) (I) The rate of…
A: Efficient market hypothesis believes that if market are efficient than it is impossible to make…
Q: hat is the relationship between the expected return of a stock and its fair expected return? When is…
A: Step 1 The anticipated return is the profit or loss that an investor expects from a known…
Q: In an investment market , understanding the concept of undervalued and overvalued stock is very…
A: The graphical representation is shown below:
Q: If investors’ aversion to risk increased, would the risk premium on a highbeta stock increase by…
A: ACCORDING TO CAPM FORMULA: REQUIRED RATE OF RETURN=risk free rate+beta×market risk premium
Q: an investment market, understanding the concept of undervalued and overvalued stocks is very…
A: Beta tells the how one asset moves with respect to market movement. Market rate of return is the…
Q: tter how the stock price fluctuates, as long as it can provide a positive return, the risk of…
A: Standard deviation is measure of risk more is risk more is standard deviation but rate of return and…
Q: A stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to…
A: Beta represents the systematic risk and it shows the relationship of the stock with the market.
In
A. always greater than the risk-free rate
B. Less than zero
C. Related to the systemic risk of the stock
D. Zero; no stock should earn a positive return
Step by step
Solved in 2 steps
- Market equity beta measures the covariability of a firms returns with all shares traded on the market (in excess of the risk-free interest rate). We refer to the degree of covariability as systematic risk. The market prices securities so that the expected returns should compensate the investor for the systematic risk of a particular stock. Stocks carrying a market equity beta of 1.20 should generate a higher return than stocks carrying a market equity beta of 0.90. Nonsystematic risk is any source of risk that does not affect the covariability of a firms returns with the market. Some writers refer to nonsystematic risk as firm-specific risk. Why is the characterization of nonsystematic risk as firm-specific risk a misnomer?Which of the following statements is CORRECT? a. Lower beta stocks have higher required returns. b. A stock's beta indicates its diversifiable risk. c. Diversifiable risk cannot be completely diversified away. d. Two securities with the same stand-alone risk must have the same betas. e. The slope of the security market line is equal to the market risk premium.According to the Capital Asset Pricing Model (CAPM), risky stocks pay a risk premium based on their level of systematic risk. Thus, a risky stock should have a higher expected return than a risk-free security unless it has a zero or negative beta. True False
- No matter how the stock price fluctuates, as long as it can provide a positive return, the risk of investing in stocks is low.If the concept of standard deviation is applied, is this true or false?Based on the CAPM model, a stock with a negative beta has which of the following characteristics? A. An expected return less than zero. B. An expected return equal to the risk-free rate. C. Since these are so rare, the CAPM model does not account for negative beta stocks. D. An expected return less than the risk-free rate.Assume that the risk-free rate remains constant, but the market risk premium declines. Which of the following is most likely to occur? a. The required return on a stock with beta = 1.0 will not change. b. The required return on a stock with beta > 1.0 will increase. c. The return on "the market" will increase. d. The return on "the market" will remain constant. e. The required return on a stock with a positive beta < 1.0 will decline.
- Assume that the CAPM assumptions hold. Consider the following statements:i. A stock with a beta below zero will tend to move in the same direction as the market but will tend to move less aggressively in that direction than the market does.ii. Alpha measures the additional risk we take on top of the risk of the market portfolio.Which one of the following expressions about risk and returns is wrong? A. In general, one reason why a stock is riskier than a bond is that because cash flows from a bond are known and promised, whereas cash flows from a stock are neither known nor promised. B. According to CAPM model, a well-diversified portfolio will have a beta which equals to 0. C. Risk premium is the extra return provided on risky assets to compensate for risk. The difference between risky return and the risk-free return. D. Unexpected return happened because new information came to light which caused our expectations about prices and returns to change.The security market line (SML) is an equation that shows the relationship between risk as measured by beta and the required rates of return on individual securities. The SML equation is given below: If a stock's expected return plots on or above the SML, then the stock's return is sufficient to compensate the investor for risk. If a stock's expected return plots below the SML, the stock's return is insufficient to compensate the investor for risk.The SML line can change due to expected inflation and risk aversion. If inflation changes, then the SML plotted on a graph will shift up or down parallel to the old SML. If risk aversion changes, then the SML plotted on a graph will rotate up or down becoming more or less steep if investors become more or less risk averse. A firm can influence market risk (hence its beta coefficient) through changes in the composition of its assets and through changes in the amount of debt it uses. Quantitative Problem: You are given the following…
- Which of the followings are required assumptions for the CAPM to hold? a Investors can borrow at the risk free rate b Investors are allowed to short any company c Investors have preference for high return and low volatility for their complete portfolio d stocks with negative correlation to the market doesn't existVolatility smile” is referred to as evidence against the Black-Scholes model. Why is that? A) Black-Scholes model assumes that different options on a given stock have different values for implied volatility b.) Volatility of returns on one and the same stock, over one and the same future period of time, can only take one value C) Black-Scholes model generates option premium close to the observed premium if the observed stock volatility is usedGiven the beta is a relative measure of systematic risk, it is reasonable to assume that there exists a relationship between required rate of return and beta. The nature of this relationship is captured in: a. None of the above b. Security Market Line c. Stock Market Equilibrium d. Inflation Risk
