b. Why should you be skeptical of such claims 24. a. Write the equation for the
ID: 1171694 • Letter: B
Question
b. Why should you be skeptical of such claims 24. a. Write the equation for the security market line (SML) and label its parts. b. Identify the market risk premium c. Identify the risk premium for the stock. 25.a. If a single product company diversifies into several unrelated product lines, perhaps by acquiring other companies, would you expect its beta to change? Why? If this same company became a conglomerate, with hundreds of products in dozens of industries, what value would you predict for its beta? b. 26. a. Explain the difference between the expected return and the required re- turn on common stock. If the stock market were perfectly competitive, would you expect there to he anv difference between a stock's expected and required return? Why? b.Explanation / Answer
25)
a. If single product company diversifies into several unrelated product lines by acquiring other companies, its beta is going to higher than before because no product is giving competition to the other and larger the products range will bring higher turnover and income alongwith growth.
b. In the case, the same company became a conglomerate with hundreds of products in dozens of industries, its beta is going to change many folds on up-side because of the same reasons and added advantages of performing in various industries. The growth effect of each industry will lead to higher beta with the stability due to cyclical effect of each industry will not allow growth to drop and beta to reduce.
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