14. The total rate of return earned on a stock is comprised of which two of the
ID: 1170380 • Letter: 1
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14. The total rate of return earned on a stock is comprised of which two of the following? I. current yield Il. yield to maturity III. dividend yield Iv. capital gains yield A. I and II only B. I and IV only c. Il and Ill only D. Il and IV only E. IlIl and IV only 15. Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.00 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a 12% return on your equity investments? A. $10.00 B. $13.33 C. $16.67 D. $18.88 E. $20.00 16. The principle of diversification tells us that A. concentrating an investment in two or three large stocks will eliminate all of your risk B. concentrating an investment in three companies all within the same industry will greatly reduce your overall risk C. spreading an investment across five diverse companies will not lower your overall risk at all D. E. spreading an investment across many diverse assets will eliminate all of the risk spreading an investment across many diverse assets will eliminate some of the risk risk present in an average risky asset, is called the particular assets A. beta coefficient 8 C. total risk D. diversifiable risk E. Treynor index 17. The amount of systematic risk present in a particular risky asset, relative to the systematic ratio 18. The linear relation between an asset's expected return and its beta coefficient is the A. reward-to-risk ratio B. portfolio weight C. portfolio risk D. security market line E. market risk premiumExplanation / Answer
Answer 14. Option E
Total return, when measuring performance, is the actual rate of return of an investment or a pool of investments over a given evaluation period. For a debt security - this is interest received as well as the capital appreciation in security price. For a stock security (asked in question), the returns are measured from dividends and capital appreciation in price.
Answer 15. Option C
This is like a constant perpetuity of $2, present value for a perpetuity = P/r, where r is the required rate of return and P is the annual constant dividend.
Present value of stock (perpetuity) = $2/12% = $16.67
Answer 16. Option E
The principle of diversification mentions that diverse investment portfolio, with different asset classes can diversify some of the risk. The diversifiable risk is the unsystematic risk. However, systematic risk is undiversifiable and hence, cannot be removed. It remains inherent in that security.
Answer 17. Option A
Average risky asset is the market portfolio asset. Amount of systematic risk present in a particular risky asset, relative to the systematic risk present in an average risky asset is called particular asset's Beta by definition.
Answer 18. Option D
The security market line is a line drawn on a chart that serves as a graphical representation of CAPM. Also known as the "characteristic line," the SML is a visual of the capital asset pricing model (CAPM), where the x-axis of the chart represents risk in terms of beta, and the y-axis of the chart represents expected return. The market risk premium of a given security is determined by where it is plotted on the chart in relation to the SML.
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