Is the following statement correct, wrong or partially correc? Why? "If the volatility of Stock A is higher than that of Stock B, the expected return of Stock A should be higher than that of Stock B." [8]
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
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- 1. Suppose stock A has a higher volatility than stock B. According to CAPM, which one is expected to deliver a higher return? A. A B. B C. The information provided is insufficient D. None of above is correct7. Calculating Returns and Standard Deviations [LO1] Based on the following information, calculate the expected return and standard deviation for Stock A and Stock B: Rate of Return If State Occurs2. Would a relatively high P/E ratio lead us to conclude that a stock is overvalued or undervalued? Why or why not?
- please answer both. If a stock's fair return increases, what will happen to the stock's value? A. It will increase. B. It will not change. C. It will decrease. If the market risk premium rises, what will happen to the stock's price? A. It will not change. B. It will increase. C. It will decrease.Q1. Why is some risk diversifiable and other risk is not (non-diversifiable)? Q2. Yes or no, are industries that have a high standard deviations (wide fluctuation of the price of the stock) not useful as investments? Beyond answering Yes or no, state the reason behind your choice.1. What effect does increasing inflation expectations have on the required returns of investors in common stock? 2. Explain the specific relationship between risk and reward and why this relationship must be true.
- 1.Which of the following is assumed by the Black-Scholes-Merton model? A.The return from the stock in a short period of time is lognormal B.The stock price at a future time is lognormal C.The stock price at a future time is normal D.None of the above7. If the point representing a stock's return and risk is above the security market, then B. the stock is underpriced A. the stock is overpriced C. the stock is fairly priced D. the stock is overpriced if the risk is high, but is underpriced if the risk is lowb) "If a stock had high returns so far, it will have low returns in the future". Discuss whether this statement is true or false, based on the knowledge of the different theories and models out there.
- 6. Which of the following statements is incorrect? A. The expected risk premium on each investment is proportional to its beta. B. Securities with a higher market risk require a higher expected return. C. The stock beta measures the sensitivity of a stock's return to the return on the market portfolio. D. If the correlation of the stock returns in your stock portfolio increases over time, then the variance of the portfolio return will decrease over time. E. None of the above 7. Which of the following correctly ranks the various asset classes in the United States according to their historical average risk premium (i.e. from low to high risk premium)? A. S&P 500 < long term government bonds < Treasury bills < small firms < corporate bonds B. Treasury bills < corporate bonds < long term government bonds < small firms < S&P 500 C. Treasury Bills < long term government bonds < corporate bonds < S&P 500 < small firms D. Long term government bonds < Treasury bills < corporate bonds < S&P 500…Beta measures a stock's sensitivity to market risks True b. False a. [Answer C] [Answer D]Which of the following statements true? A call option price is increasing in stock return volatility A put option price is decreasing in stock return volatility I. II. A) I. and II. are true B) I. is true and II. is false C) II. is true and I. is false D) I. and II. are false |