Which of the following is true with Money Market? Select one: a. Attracts long term investor and borrower b. None of the options c. Deals with old stocks issued by companies d. Needs fixed place for trading e. Provides long term instruments which are already issued by companies
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- Which of the following statements is true? A. Because of flotation costs, dollars raised by retaining earnings must work harder than dollars raised by selling new shares. B. All other things being equal, a call option price will increase, and a put option price will decrease if an exercise price increases. C. Security market line (SML) plots return against total risk which is measured by the standard deviation of returns. D. Because potential long-term returns, income from rent-payments, diversification, and inflation hedge, real-estate would be a good investment.When estimating the cost of equity by use of the CAPM, three potential problems are (1) whether to use long-term or short-term rates for rRF, (2) whether or not the historical beta is the beta that investors use when evaluating the stock, and (3) how to measure the market risk premium, RPM. These problems leave us unsure of the true value of rs. a. true b. falseSuppose the Capital Asset Pricing Model (CAPM) is valid in a market. Use CAPM to ex- plain and answer following questions. Note: There is no relationship between each situation. (a) Can security A exist in the market? (Hint: Security market line) If yes, compute risk premium on security A. If not, is this security underpriced or overpriced? Expected return 5% Asset Beta Risk-free Market 12% 1 A 15% 1.3 (b) Can security B exist in the market? (Hint: Security market line) If yes, compute risk premium on security B. If not, is this security underpriced or overpriced? Expected return 6% Asset Beta Risk-free Market 13% 16.5% 1 1.5 Suppose the expected cash flow can be collected from investment in security B is $1000 at time 1. And an investor thinks the beta of security B is 1.8. But the actual beta is given in the above table. Then how much more/less (you also need to select "more" or "less") will he offer for the firm than it is truly worth at time 0? Hint: the present value of the cash…
- Which of the following is/are true about the Efficient Markets Hypothesis (EMH) I.The required rate of return on a stock is equal to the expected return II. Stocks are fairly valued III. Stocks are always in equilibrium IV. It is impossible for an investor who does not have inside information to constantly “beat the market” Select one: a. I and II only b. II and IV only c. I only d. All of the aboveWhich of the following is true with Primary Market? Select one: a. Deals with old stocks issued by companies b. Provides liquidity for instruments which are already issued by companies c. Needs fixed place for trading d. None of the options e. Increases riskWhich of the following is true with Primary Market? Select one: a. None of the options b. Provides liquidity for instruments which are already issued by companies c. Deals with old stocks issued by companies d. Increases risk e. Needs fixed place for trading Which of the following is not a financial instrument? Select one: a. Merchant bankers b. Mutual Fund Companies c. All the options d. Banks e. Leasing Companies
- Which of the following statements is true? A. Companies look for investments with payback periods that are larger than their maximum accepted payback period B. An investment with a profatibility index less than 1 is profitable and desirable OC. A projected is accepted if the IRR is less than the cost of capital O D. None of the above are trueYou have been provided the following data about the securities of three firms, the market portfolio, and the risk-free asset: Fill in the missing values in the table. (Leave no cells blank - be certain to enter O wherever required. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) a. Security Firm A Firm B Firm C The market portfolio The risk-free asset b-1. Expected Return Expected return 0.118 % 0.132: 0.113 0.12 0.05 Standard Deviation 0.23 0.74 0.23 Correlation* 0.42 0.27 With the market portfolio What is the expected return of Firm A? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Beta 0.94 1.49S1: Call options' value go up if the market perceives the underlying asset to be undervalued. S2: Put options' increase in value is parallel to the increase of risk of an investment. A. Both statements are true B. Both statements are false C. Only statement 1 is true D. Only statement 2 is true
- Which of the following is true with Primary Market? Select one: a. None of the options b. Provides liquidity for instruments which are already issued by companies c. Increases risk d. Needs fixed place for trading e. Deals with new issues made by companies for the first timeYou have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand the value of diversification or why stocks with the biggest standard deviations don’t always have the highest expected returns. Your assignment is to address the client’s concerns by showing the client how to answer the following questions: What is the Capital Asset Pricing Model (CAPM)? What are the assumptions that underlie the model? What is the Security Market Line (SML)?Suppose we observe from market data that, for a given non-dividend paying stock, F, ± Soer. What might explain the inequality in this relationship (i.e. why don't we observe Fo = Soer") if markets are efficient? Hint: try to identify real-world market frictions that might cause cases where F, + S,e! does not result in arbitrage opportunities rT