Question

which of the following is not a valid assumption of the M&M model?

a.Homogeneous expectations

b.imperfect capital markets

c.homogeneous business risk class

if the correlation between two stocks is -1 the return on the stocks:

a.are unrelated to one another

b.totally offset each other producing a rate of return of zero

c. move perfectly opposite to one another

Answer 1

Question:

Which of the following is not a valid assumption of the M&M model?

a. Homogeneous expectations

b. Imperfect capital markets

c. Homogeneous business risk class

Ans: b. Imperfect capital markets

Explanation:

Modigliani-Miller (M&M) Approach assumes the existence of perfect capital market. So, the answer is option b. “Imperfect Capital Markets” as it is not a valid assumption of the M & M model.

Question:

If the correlation between two stocks is -1 the return on the stocks:

a. are unrelated to one another

b. totally offset each other producing a rate of return of zero

c. move perfectly opposite to one another

Ans: c. move perfectly opposite to one another.

Explanation:

The return and values of negatively correlated stocks always moves in the exact opposite direction. So, our answer option is c. “moves perfectly opposite to one another” as the correlation between the two stocks is -1.