Financial Management - Study Mode

[#971] Relationship between total risk of stock, diversifiable risk and market risk is classified as
Correct Answer

(A) total risk

Explanation

Solution: Relationship between total risk of stock, diversifiable risk and market risk is classified as total risk. Total risk is an assessment that identifies all of the risk factors associated with pursuing a specific course of action.

[#972] In arbitrage pricing theory, higher required rate of return is usually paid on stock
Correct Answer

(B) higher dividend

Explanation

Solution: In arbitrage pricing theory, higher required rate of return and higher dividend is usually paid on stock. The Arbitrage Pricing Theory (APT) is a theory of asset pricing that holds that an asset’s returns can be forecasted with the linear relationship of an asset’s expected returns and the macroeconomic factors that affect the asset’s risk.

[#973] Formula written as market risk premium divided by standard deviations of returns on market portfolio is used to calculate
Correct Answer

(A) capital market line

Explanation

Solution: Formula written as market risk premium divided by standard deviations of returns on market portfolio is used to calculate capital market line. Capital market line (CML) is a graph that reflects the expected return of a portfolio consisting of all possible proportions between the market portfolio and a risk-free asset.

[#974] In capital asset pricing model, investors assume that buying and selling activity will
Correct Answer

(B) not affect stock prices

Explanation

Solution: In capital asset pricing model, investors assume that buying and selling activity will not affect stock prices. The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital.

[#975] For investors, steeper slope of indifference curve shows more
Correct Answer

(A) risk averse investor

Explanation

Solution: For investors, steeper slope of indifference curve shows more risk averse investor. A risk averse investor is an investor who prefers lower returns with known risks rather than higher returns with unknown risks. In other words, among various investments giving the same return with different level of risks, this investor always prefers the alternative with least interest.