Which of the following best describes the capital asset pricing model?
A. Determines the amount of capital that is needed in particular situations
B. Is used to determine the price of futures contracts
C. Relates the return on an asset to the return on a stock index
D. Is used to determine the volatility of a stock index
C
CAPM relates the return on an asset to its beta. The parameter beta measures the sensitivity of the return on the asset to the return on the market. The latter is usually assumed to be the return on a stock index such as the S&P 500 .
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A customer who is higher in dominance tends to do which of the following?
A) display an eagerness to agree quickly B) curb a desire to initiate demands C) cooperate excessively with others D) attempt to control situations E) wait for others to speak first
Firm M's earnings and stock price tend to move up and down with other firms in the S&P 500, while Firm W's earnings and stock price move counter cyclically with M and other S&P companies. Both M and W estimate their costs of equity using the CAPM, they have identical market values, their standard deviations of returns are identical, and they both finance only with common equity. Which of the following statements is CORRECT?
A. M should have the lower WACC because it is like most other companies, and investors like that fact. B. M and W should have identical WACCs because their risks as measured by the standard deviation of returns are identical. C. If M and W merge, then the merged firm MW should have a WACC that is a simple average of M's and W's WACCs. D. Without additional information, it is impossible to predict what the merged firm's WACC would be if M and W merged. E. Since M and W move counter cyclically to one another, if they merged, the merged firm's WACC would be less than the simple average of the two firms' WACCs.
Words or terms in contracts that are subject to more than one reasonable interpretation can lead to bilateral mistakes
Indicate whether the statement is true or false
Which of the following is true of securities analysts?
A) They raise initial external equity finance privately for firms. B) They are primarily involved in underwriting of securities. C) They find prospective buyers for new stocks or bonds issue. D) They use a variety of models and techniques to value stocks.