Which of the following statements is CORRECT? Select one: a. If a stock’s risk i

Question

Which of the following statements is CORRECT?

Select one:

a. If a stock’s risk increases but its expected rate of growth in earnings and dividends remain constant, then the new equilibrium price of the stock will almost certainly increase.

b. If the stock market is efficient, then the actual realized returns on all stocks will equal their expected rates of return.

c. An implication of the semistrong-form of the efficient markets hypothesis is that you cannot, over the long run, benefit from trading on information reported in The Wall Street Journal.

d. If the market is strong-form efficient, all stocks will be equally risky.

e. Because of increased globalization, all of the world’s stock markets are equally efficient.

The cost of preferred stock is

Select one:

a. lower than the cost of long-term debt.

b. higher than the cost of common stock.

c. higher than the cost of long-term debt and lower than the cost of common stock.

d. lower than the cost of convertible long-term debt and higher than the cost of common stock.

Explanation / Answer

Option B is correct.

If the stock markets are efficient, then the investor won’t will be able to generate any excess returns and realized and expected returns both will be the same. The reason being, if the markets are efficient, the stocks would be trading at their intrinsic value and the investors will not be able to generate any excess returns by buying undervalued stocks because there will not be any such stock.

Option C is correct.

Preferred stocks possess higher risk than long term debt but lower risk than common stocks. Therefore, their cost is higher than long term debt but lower than cost of common stock.

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