Which of the following is not a factor in determining the required return on the bond?...

Which of the following is not a factor in determining the required return on the bond?

a. Political risk b. liquidity risk c. default risk d. the inflation rate

Which of the following statements is not true regarding beta?

a:Beta is the ratio of a firm's systematic risk to the overall risk of the market

b. a stock's risk premium depends upon its beta

c. a stock with a beta of two will have a required return which is twice as large as the expected return of the market.

d. beta increases as the correlation between the stock and the market increases.

You own a preferred stock that pays you $6 per year forever. Your brother offers to buy it from you for $150. what interest rate would you be earing if you accepted his offer?

Expert Solution

1:Inflation risk

the required rate of return on a bond takes into account different types of risks. It considers political risk because the return will depend upon the political and financial situation of an economy. It considers liquidity risk since a person sacrifices liquidity by investing in bonds. It also takes into account default risk that occurs due to default by issuer. It does not consider inflation risk.

2: b. a stock's risk premium depends upon its beta

The beta represents the systematic risk. A beta of 1 implies that the stock has same return as the market. Hence the beta of two implies that the stock has double the expected return of the market. Higher the correlation between stock and market, higher will be the beta.

3: return on preferred stock= annual dividend/stock price

= 6/150

= 4%

jeff jeffy answered 2 years ago

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