Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? ABBeta1.100.90Constant growth rate7.00%7.00%a. Stock A must have a higher dividend yield than Stock B.b. Stock B's dividend yield equals its expected dividend growth rate.c. Stock B must have the higher required return.d. Stock B could have the higher expected return.c. Stock A must have a higher stock price than Stock B.

The objective of the question is to determine which of the given statements is correct based on the…

Answered: Stocks A and B have the following data.…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 25P

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Question

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

	A	B
Beta	1.10	0.90
Constant growth rate	7.00%	7.00%

a. Stock A must have a higher dividend yield than Stock B.

b. Stock B's dividend yield equals its expected dividend growth rate.

c. Stock B must have the higher required return.

d. Stock B could have the higher expected return.

c. Stock A must have a higher stock price than Stock B.

Definition Definition Degree to which financial markets incorporate all available information into the prices of assets. In a more efficient market, the prices reflect the available information more than that in a weak efficient market. It is difficult for investors to outperform the market in a strong efficient market. This is because all the available information is already discounted in the asset's price. However, in a weak-form efficiency, the market does not reflect all information in the asset's price. As a result, it becomes easier to generate better returns in a weak form or an inefficient market.

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