9. According to the Capital Asset Pricing Model, investors are primarily concern
ID: 2786735 • Letter: 9
Question
9. According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio. A. True B. False 10. According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio. A. True B. False 11. If investors become less averse to risk, the slope of the Security Market Line (SML) will increase. A. True B. False 12. The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold. A. True B. False 13. The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond. A. True B. False 14. According to the basic DCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock A. True B. False 15. The cost of capital used in capital budgeting should reflect the average cost of the various sources of investor-supplied funds a firm uses to acquire assets. A. True B. False 16. The cost of debt is equal to one minus the marginal tax rate multiplied by the average coupon rate on all outstanding debt. A. True B. FalseExplanation / Answer
9. True (Investors are concerned with the stocks contribution to the portfolio risk not the isolated risks of stocks).
10. True (Investors are concerned with the stocks contribution to the portfolio risk not the isolated risks of stocks).
11. False as with increasing risk, the expected return changes along the SML and there's no change in the slope.
12. False. It also includes the capital gains anticipated from selling the stock.
13. True. With bonds, the payments are defined.
14. False. While valuing a company, business is considered a going concern and not limited to a few years to estimate its true value.
15. True. The WACC should reflect the average cost of all capital sources and their required return.
16. False. Cost of debt depends on yield to maturity
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