# Which One Of The Following Is A Correct Statement Concerning Risk Premium?

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Just declared hat it is increasing its annual dividend from \$1. 00 per share to \$1. 25 per share. Fifth stock price remains constant, then the dividend yield will increase. This is because the denominator in dividend yield remains unchanged, but the numerator increases. 6. A bond that makes no coupon payments and is initially priced at a deep discount is called a zero.

Coupon bond. 7. A symmetric, bell. Shaped frequency distribution that is completely defined by its mean and standard deviation is the Normal distribution. 8. Which one of the following is a correct statement concerning risk premium?

The greater the volatility of returns, the greater the risk premium. 9. Estimates using the arithmetic average will probably tend to overestimate values over the long-term while estimates using the geometric average will probably tend to underestimate values over the short- term, 10.

The risk premium for an individual security is computed by multiplying the security’s beta by the market risk premium. CAMP = REF + Beta x (MR.) 11. Standard deviation measures total risk. 12. Which one of the following would indicate a portfolio is being effectively diversified? A decrease in the portfolio standard deviation 13.

The intercept point of the security market line is the rate of return which corresponds to the risk free rate of return. (the y-intercept here, from the formula for the slope of a line) 14.

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The principal amount of a bond that is repaid at the end of the loan term is called the bond’s face value (note the question asks for principal amount, not date) 15. Which one of the following statements is correct concerning the expected rate Of return on an individual stock given various States Of the economy?

### The Intercept Point Of The Security Market Line Is The Rate Of Return Which Corresponds To:

The expected return is a weighted average where the probabilities of he economic states are used as the weights. 6. The Capital Market Line is the pricing relationship between the optimal portfolio and the standard deviation of portfolio return. (extra credit question) Quantitative questions: 1 7, The Lo Sun Corporation offers a 6% bond with a current market price of \$875. 05. The yield to maturity is 7. 34%. The face value is \$1,000. Interest is paid semiannually, How many years is it until this bond matures? IV -875. 05 p MET 60/2 RATE or i/y 7. 34%/2 NIPPER or n ex. = 16 18 Six months ago, you purchased 100 shares Of stock in BBC co. T a price Of \$43. 89 a share.

BBC stock pays a quarterly dividend of \$. 10 a share. Today, you sold all Of your shares for \$45. 13 per share. What is the total amount Of your capital gains on this investment? The information about the dividends is not needed to solve for capital gains. 19. The common stock of Eddies Engines, Inc. Sells for \$25. 71 a share. The stock is expected to pay SSL . 80 per share next month when the annual dividend is distributed. Eddies has established a pattern of increasing its dividends by 4% annually and expects to continue doing so. What is the market rate of return on this stock?

This is a constant growth or Gordon growth model problem. 20, Fred Flintlock wants to earn a total of on his investments. He recently purchased shares of BBC stock at a price of \$20 a share. The stock pays a \$1 a year dividend. The price of BBC stock needs to if Fred is to achieve his rate of return. Total return dividend yield capital gains yield = 1/20 + cap gains yell = 5% + cap gains yield cap gains yield therefore price must increase by 21. The common stock of Grady Co. Had an 11. 25% rate of return last year. The dividend amount was 5. 0 a share which equated to a dividend yield Of I _5%.

What was the rate of price appreciation on the stock? 11. 25% – -9. 75% 22. Your firm offers a ID-year, zero coupon bond. The yield to maturity is 8. 8%. What is the current market price Of a \$1,000 face value bond? IV 430. 24 RATE or i,’y 10 *note: this bond used annual compounded as was given during the exam. 23. Angelica’s made two announcements concerning its common stock today, First, the company announced that its next annual dividend has been set at \$2. 16 a share. Secondly, the company announced that all future dividends will increase y 4% annually.

What is the maximum amount you should pay to purchase a share of Angelica’s stock if your goal is to earn a rate of return? 24 The bonds issued by Manson & Son bear a 6% coupon, payable semiannually, The bond matures in 8 years and has a \$1,000 face value. Currently, the bond sells at par. What is the yield to maturity? IV 65/2 3%xx = *Note: a bond selling at par value will have a yield to maturity equal to its coupon rate. 25. Eight months ago, you purchased 400 shares of Winston, Inc. Stock at a price of \$54. 90 a share. The company pays quarterly dividends of \$. 50 a share.

Today, you sold all of your shares for \$49. 30 a share. What is your total percentage return on this investment? In eight months, you would receive two dividends, for total dividends per share of \$1. 00 26. Zoom, Inc. Stock has a beta of 1. 5. The risk-free rate of return is 3. 7% and the market rate of return is 9. 5%, What is the amount of the risk premium on Zoom stock? This is the Capital Asset Pricing Model. 3. 7% + – 3. 7%) = 3. 7% + 8. 7%, therefore the risk premium on Zoom stock is 8. 7% 27 _ Chocolate and Rum, Inc. Offers a 7% coupon bond With semiannual payments and a yield to maturity of 7. %.

The bonds mature in 9 years. What is the market price Of a 51,000 face value bond? IV 953. 28 75/2 7. 73%/2 28. The Reading Co. Has adopted a policy of increasing the annual dividend on its common stock at a constant rate of annually, The last dividend it paid was \$0. 90 a share. What will the company’s dividend be in six years? This is future value: 29. Can’t Hold Me Back, Inc. Is preparing to pay its first dividends. It is going to pay \$1. 00, \$2. 50, and \$S_CO a share over the next three years, respectively.

After that, the company has stated that the annual dividend will be \$1. 5 per share indefinitely What is this stock worth to you per share if you demand a 7% rate of return? This is the two stage model where each dividend is discounted separately until the dividend stabilizes in year 4. Period Dividend 1. 25 IV formula (1. 25/ 2. 1836 4. 0815 14. 5767 Total iv Note: the stock becomes a perpetuity in year 4 (terminal value as of the end of year 3) and the terminal value then must be discounted back too present value today. 30. Which of the following amounts is closest to the value of a bond that pays \$55 semiannually and has an effective semiannual interest rate Of 5%?