Which statement is correct about common and preferred stocks? Which statement is
ID: 2654863 • Letter: W
Question
Which statement is correct about common and preferred stocks?
Which statement is correct?
According to the CAPM, risk premium is lower if the return on the risky asset has a greater tendency to move in sync with the market.
Which statement is correct? Sigma denotes standard deviation.
It is possible that sigma_A = sigma_B and the risk premiums are different depending on how they are correlated with the market.
Blue stock’s total (annual return) variance is 0.04; Red stock’s is 0.01. Which one of the following is definitely correct?
Firms can choose to pay common dividends before the due preferred dividends are completely paid.Explanation / Answer
Answer: To the first question:
Preferred dividends are cumulative; common dividends can be skipped and they are not cumulative.
When a preferred stock is designated as cumulative, holder of it must receive any past dividends that had not been paid on the preferred stock and its current year dividend, before common stockholders are paid any dividends.
Common dividend once skipped for any particular year, the company is under no obligation to pay it in arrear.
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