CORPORATE FIN.(LL)-W/ACCESS >CUSTOM<
11th Edition
ISBN: 9781260269901
Author: Ross
Publisher: MCG CUSTOM
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Textbook Question
Chapter 10, Problem 3CQ
Risk and Return We have seen that over long periods stock investments have tended to substantially outperform bond investments. However, it is not at all uncommon to observe investors with long horizons holding their investments entirely in bonds. Are such investors irrational?
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We have seen that over long periods, stock investments have tended to substantially outperform bond investments. However, it is common to observe investors with long horizons holding portfolios composed entirely of bonds. Are such investors irrational?
True or False
An asset or stock with a beta less than 1.0 means the stock is more risky than the market in general.
Bonds that have a callable feature allow the bond holder to convert their debt to common shares of stock.
Bond holders have voting rights and common shareholders do not.
Bond holders have first claim on assets in the event of a bankruptcy, so they are less risky than common stock.
An ordinary annuity is preferred by investors because they receive their payment at the beginning of each period.
Given that higher-risk investments, such as small-company stocks, have outperformed other investments over time, why don’t all investors choose to invest only in these high-risk securities? (Answer the question correctly and in-depth.)
Chapter 10 Solutions
CORPORATE FIN.(LL)-W/ACCESS >CUSTOM<
Ch. 10 - Investment Selection Given that RadNet was up by...Ch. 10 - Investment Selection Given that Transocean was...Ch. 10 - Risk and Return We have seen that over long...Ch. 10 - Prob. 4CQCh. 10 - Effects of inflation Look at Table 10.1 and Figure...Ch. 10 - Risk Premiums Is it possible for the risk premium...Ch. 10 - Prob. 7CQCh. 10 - Returns Two years ago, the Lake Minerals and Small...Ch. 10 - Prob. 9CQCh. 10 - Historical Returns The historical asset class...
Ch. 10 - Calculating Returns Suppose a stock had an initial...Ch. 10 - Calculating Yields In Problem 1, what was the...Ch. 10 - Calculating Returns Rework Problems 1 and 2...Ch. 10 - Prob. 4QPCh. 10 - Prob. 5QPCh. 10 - Bond Returns What is the historical real return on...Ch. 10 - Calculating Returns and Variability Using the...Ch. 10 - Risk Premiums Refer to Table 10.1 in the text and...Ch. 10 - Prob. 9QPCh. 10 - Prob. 10QPCh. 10 - Calculating Real Rates Given the information in...Ch. 10 - Holding Period Return A stock has had returns of...Ch. 10 - Prob. 13QPCh. 10 - Prob. 14QPCh. 10 - Calculating Returns You bought a stock three...Ch. 10 - Calculating Real Returns Refer to Table 10.1. What...Ch. 10 - Return Distributions Refer back to Table 10.2....Ch. 10 - Prob. 18QPCh. 10 - Calculating Returns and Variability You find a...Ch. 10 - Arithmetic and Geometric Returns A stock has had...Ch. 10 - Arithmetic and Geometric Returns A stock has had...Ch. 10 - Calculating Returns Refer to Table 10.1 in the...Ch. 10 - Prob. 23QPCh. 10 - Using Return Distributions Suppose the returns on...Ch. 10 - Using Return Distributions Assuming that the...Ch. 10 - Prob. 26QPCh. 10 - Using Probability Distributions Suppose the...Ch. 10 - Prob. 28QPCh. 10 - Prob. 1MCCh. 10 - Prob. 2MCCh. 10 - Assume you decide you should invest at least part...Ch. 10 - Prob. 4MCCh. 10 - A measure of risk-adjusted performance that is...Ch. 10 - What portfolio allocation would you choose? Why?...
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- For the holder of a fixed-rate coupon bond, reinvestment risk is a bigger problem during a period of falling interest rates than during a period of rising interest rates. Why, Explain.arrow_forwardWhat are the most significant differences between stocks and bonds? A day would come when bonds would be a superior investment option than ordinary shares.arrow_forwardOne often finds that a company’s bonds have a higher yield than its preferred stock, eventhough an investor considers the bonds to be less risky than the preferred. What causes thisyield differential?arrow_forward
- Explain whether the following statements are true or false. Justify your answer. a) If interest rate increase the price of a shorter maturity bond will decrease more then a longer maturity bond. b) If rating agencies downgrade a bond, the yield to maturiy on the bond will increase. c) the longer the duration of the bond, the higher will be the reinvestment risk d) The income from bond is more uncertain compared to the income from shares e) Managers want to maximize the intrisic value of the stock not the market price of the stock.arrow_forwardDescribe clearly how theories from behavioural finance can justify the following abnormal phenomena of investment: (1) Investors exhibit tendency to overpay for assets with poor average return but a potential to deliver a huge payoff, such as penny stocks or corporate bonds of financially distressed companies. (2) Investors exhibit tendency to sell winning stocks too early but hold losing stocks for too longarrow_forwardSelect all the correct statements. a. The no-arbitrage price of a bond is equal to its present value. b. If there is an arbitrage opportunity, it means one can make a risk-free profit. c. Small arbitrage opportunities may occasionally exist in real markets due to lack of information. d. The law of one price is based on the no-arbitrage assumption. e. Arbitrary investments and arbitrage generating investments are basically the samearrow_forward
- A) Which of the following is not the function of the secondary market Select one: a. Marketability to securities b. Liquidity of securities c. None of these d. It gurantees fixed rate of return to the investor B) Which of the following are short-term financial instruments? Select one: a. Share of Rysut cement b. None of these c. A bond with five years maturity d. A banker’s acceptance C) money market does not have any role in the development of capital market a. True b. Falsearrow_forwardA firm is planning to issue bonds to make an equity repurchase to increase its stock price. It is basing its analysis on the fact that there will be fewer shares outstanding after the repurchases, and higher earnings per share. Will the higher earnings per share always translate into a higher stock price? a. No b. Depends on stock price c. Yes d. Indifferentarrow_forwardIf a firm increases its financial risk by selling a large bond issue that increases its financial lewverage explain this assumption?Also what is the relationshipbetween risk and return. Explain with examples bold examples.arrow_forward
- Identify those trends that are unfavorable from theviewpoint of a bondholder. (More than one answer may becorrect.)a. Market interest rates are steadily rising.arrow_forwardWhich of the following statements is the least accurate? a. Security returns are composed of cash returns and capital gains. b. When the shareholder’s required rate of return is higher than ROE, a company can increase the stock price by retaining and reinvesting more. c. The geometric average return is always smaller than or equal to the arithmetic average return. d. When the coupon rate is smaller than the yield to maturity, a bond sells below par (discount).arrow_forwardWhich of the following statements is incorrect? Group of answer choices Unsystematic risk can be eliminated by holding a diversified portfolio. Income taxes have the effect of increasing the cost of debt for a firm. All the answers are correct except one. Accounting balance sheets reflect book values. The current cost of debt for a publicly traded bond is derived from its yield to maturity calculation.arrow_forward
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