2. Which of the following statements is FALSE? A) Stock returns will tend to move together if they are affected similarly by economic events. B) Stocks in the same industry tend to have more highly correlated returns than stocks in different industries. C) Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together. D) When firms carry both types of risk, only the firm-specific risk will be diversified when we combine many firms' stocks into a portfolio.

2. Which of the following statements is FALSE? A) Stock returns will tend to move together if they are affected similarly by economic events. B) Stocks in the same industry tend to have more highly correlated returns than stocks in different industries. C) Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together. D) When firms carry both types of risk, only the firm-specific risk will be diversified when we combine many firms' stocks into a portfolio.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter1: Introduction And Goals Of The Firm

Section: Chapter Questions

Problem 1.6CE

See similar textbooks

Similar questions

Suppose stock returns can be explained by the following three-factor model: R=RF+ B1F+B2F2-B3F3 Assume there is no firm-specific risk. The information for each stock is presented here: ẞ1 B2 ẞ3 Stock A 1.75 Stock B .82 Stock C .83 .75 $.50 1.35 -.70 -.33 1.44 The risk premiums for the factors are 7.1 percent, 6.3 percent, and 6.7 percent, respectively. You create a portfolio with 20 percent invested in Stock A, 20 percent invested in Stock B, and the remainder in Stock C. The risk-free rate is 4.2 percent. What is the beta for each factor for the return on your portfolio? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Factor F1 Factor F2 Factor F3 What is the expected return on your portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return %
Suppose the world can be described in two states, and two stocks are available with future per share prices: State X Y 1 $10 $15 2 $20 $11 The current prices for stock X and Y are $13 and $10, respectively. a) Suppose now you have saved $3900 to invest in stocks (X and Y), what is your investment strategy to maximize your total wealth when the future is in State 1? b) Based on a), what is your investment strategy if you want to keep your future wealth as smooth as possible between the two States?
Suppose Caroline is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds.CombinationFraction of Portfolio in Diversified StocksAverage Annual ReturnStandard Deviation of Portfolio Return (Risk)(Percent)(Percent)(Percent)A 0 1.50 0B 25 3.00 5C 50 4.50 10D 75 6.00 15E 100 7.50 20There is a relationship between the risk of Caroline's portfolio and its average annual return.Suppose Caroline currently allocates 75% of her portfolio to a diversified group of stocks and 25% of her portfolio to risk-free bonds; that is, she chooses combination D. She wants to reduce the level of risk associated with her portfolio from a standard deviation of 15 to a standard deviation of 5. In order to do so, she must do which of the following? Check all that apply. Sell some of her stocks and use the proceeds to purchase…
Assume that an economy can have four states: Severe recession, Mild recession, Normal growth, Boom. Probability of each scenario, stock and bond annual returns in that scenario are provided below. Let's also assume that you are creating a portfolio with 65% stocks and 35% bonds. Economy State Severe recession Probability 0.20 Stock Return (%) Bond Return (%) -37 -9 Mild recession 0.30 -11 15 Normal growth 0.40 14 8 Boom 0.10 30 -5 How much is the annual standard deviation of Stock returns? Enter your answer in the following format: 0.1234 Hint: Answer is between 0.1938 and 0.2373
3) Stock, Stock Options, and Restricted Stock are the market based unconditional compensations. Select an alternative True False
Deacon Corporation has just announced its intent to undertake a three-for-one stock split at the end of the next quarter. How will this announcement most likely affect trading activity for Deacon shares? O Investors will likely show increased interest in purchasing Deacon shares, thus leading to an increase in the current price per share. Investors will likely start dumping Deacon shares, thus leading to a decrease in the current price per share. Investors will likely be indifferent to the announcement, and Deacon's share price and trading volume will remain at their current levels. O Investors will likely begin to show a strong preference for purchasing odd lots of the firm's shares, thus leading to a decline in the price of round lots. eTextbook and Media
470 7 Which of the following is not an implication of the EMH? a. to do superior industry or company analysis, one must understand the variables that affect returns and do a superior job of estimating these variables b. aggregate market analysis that involves very detailed analysis of reliable historical economic data should outperform a simple buy and hold policy. c. a superior analyst is one who can consistently select stocks that provide positive abnormal returns on a risk adjusted basis. d. if a portfolio manager does not have any superior analysts, they should consider investing funds in a index fund e. if a portfolio manager has some superior analytical skills, they should be encouraged to concentrate in second tier stocks that have liquidity but may be neglected.
How to replicate the payoff of a bond (riskless portfolio) using shares and call options? Based on this conclusion, how does a single-step binomial tree option pricing model work?
You are evaluating the possibility that your company bids $150,000 for a particular construction job. (a) If a bid of $150,000 corresponds to a relative bid of 1.20, what is the dollar profit that your company would make from winning the job with this bid? Show your work. (b) Calculate an estimate of the expected profit of the bid of $150,000 for this job. Assume that, historically, 55 percent of the bids of an average bidder for this type of job would exceed the bid ratio of 1.20. Assume also that you are bidding against three other construction companies. Show your work.
Consider the following statements: If dividends are taxed more heavily than capital gains, then investors: I. Should pay more for stocks with low dividend yields. II. Should pay more for stocks with high dividend yields. III. Should pay the same for stocks with high or low dividend yields. IV. Should accept a lower pre-tax rate of return from stocks with high dividend yields. V. Should accept a lower pre-tax rate of return fróm stocks with low dividend yields. Which of the statements is true? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. Il only a Il only I and IV only I and V only I only e
Question 2. Consider the financing decision of a new investment opportunity for the four firms. The new investment opportunity yields a return of Rs. 1.2 at the end of the period with an initial investment of Rs. 1 in the beginning of the period. Assume the rate of interest is zero and the investors are competitive. The types of the firms are T1, T2, T3 and T4. Each firm has an existing asset to generate a fixed returns plus a random part Z. The random variable Z follows a Bernoulli distribution as Z= 1.5 or -1.5 with equal probability. The prior belief about the firms type and their fixed returns are given by T1: 0.3 P(TI) = 0.01 T2: 1.5 P(T2)= 0.45 T3: 20 P(T3) = 0.09 T4: 1.6 P(T4) = 0.45 (Note that given the fixed returns any firm say T1 has the total cash flow at the end of the period is 0.30+Z+1.2 if it undertakes the investment; or 0.30+Z if it does not undertake the new investment) 2 Each firm decides whether to finance the new investment with either debt or equity or to pass…
When a company decides to sell its stock to the public for the first time, it hires the services of a broker or brokerage firm. True or False