Chapter 11-Study Guide

# Chapter 11-Study Guide - Chapter 11 COMMON STOCKS: ANALYSIS...

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Chapter Eleven Common Stocks: Analysis and Strategy 135 Chapter 11 COMMON STOCKS: ANALYSIS AND STRATEGY 1. The required rate of return for a common stock is defined as the: a. expected return given an assumed set of probabilities and expected cash flows on the stock. b. minimum expected return necessary to induce an investor to purchase the stock. c. maximum expected return based on estimates of expected cashflows from the stock. d. expected return after evaluation of the risk on the stock has been taken. (b, easy) 2. The -------------- provides investors with a method of calculating a required return for a stock. a. dividend discount model b. risk-free rate c. Fisher model d. Capital Asset Pricing Model (d) 3. The nominal risk-free rate is the: a. same as the real risk-free rate. b. real risk-free rate plus an inflation premium. c. real risk-free rate plus an interest rate premium. d. market interest rate. (b) 4. If investors in the market become more pessimistic, it is expected that the risk premium will ----------- and the required return will ----------. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase (a) 5. Under the CAPM, the relationship between the required rate of return and risk is assumed to be

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Chapter Eleven Common Stocks: Analysis and Strategy 136 a. linear and downward sloping. b. nonlinear and downward sloping. c. linear and upward sloping. d. nonlinear and upward sloping. (c) 6. The equity risk premium for the market is 8 percent. Wilson Products has a beta of 0.4. The real risk-free rate is 2 percent and the expected inflation premium is 5 percent. The required rate of return for Wilson is __________ percent. a.
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## This note was uploaded on 06/02/2011 for the course FINA 3331 taught by Professor Staff during the Spring '08 term at Texas A&M University, Corpus Christi.

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Chapter 11-Study Guide - Chapter 11 COMMON STOCKS: ANALYSIS...

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