1) The type of the risk that can be eliminated by diversification is called A) market risk. B) unique risk. C) interest rate risk. D) default risk. 2) Learn and Earn Company is financed entirely by common stock that is priced to offer a 2 percent expected rate of return. The stock price is $60 and the earnings per share are $12. TH company wishes to repurchase 50 percent of the stock and substitutes an equal value of del yielding 8 percent. Suppose that before refinancing, an investor owned 100 shares of Learn ar Earn common stock. What should he do if he wishes to ensure that risk and expected return c his investment are unaffected by this refinancing? A) Borrow $3,000 and buy 50 more shares. B) Continue to hold 100 shares. C) Sell 50 shares and purchase $3,000 of 8 percent debt (bonds). D) Sell 8 percent of his stock and invest in bonds. 3) A stock return's beta measures A) the stock's covariance with the risk-free asset. B) the change in the stock's return for a given change in the market return. C) the return on the stock. D) the standard deviation on the stock's return.
1) The type of the risk that can be eliminated by diversification is called A) market risk. B) unique risk. C) interest rate risk. D) default risk. 2) Learn and Earn Company is financed entirely by common stock that is priced to offer a 2 percent expected rate of return. The stock price is $60 and the earnings per share are $12. TH company wishes to repurchase 50 percent of the stock and substitutes an equal value of del yielding 8 percent. Suppose that before refinancing, an investor owned 100 shares of Learn ar Earn common stock. What should he do if he wishes to ensure that risk and expected return c his investment are unaffected by this refinancing? A) Borrow $3,000 and buy 50 more shares. B) Continue to hold 100 shares. C) Sell 50 shares and purchase $3,000 of 8 percent debt (bonds). D) Sell 8 percent of his stock and invest in bonds. 3) A stock return's beta measures A) the stock's covariance with the risk-free asset. B) the change in the stock's return for a given change in the market return. C) the return on the stock. D) the standard deviation on the stock's return.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:1) The type of the risk that can be eliminated by diversification is called
A) market risk.
B) unique risk.
C) interest rate risk.
D) default risk.
2) Learn and Earn Company is financed entirely by common stock that is priced to offer a 20
percent expected rate of return. The stock price is $60 and the earnings per share are $12. The
company wishes to repurchase 50 percent of the stock and substitutes an equal value of debt
yielding 8 percent. Suppose that before refinancing, an investor owned 100 shares of Learn and
Earn common stock. What should he do if he wishes to ensure that risk and expected return on
his investment are unaffected by this refinancing?
A) Borrow $3,000 and buy 50 more shares.
B) Continue to hold 100 shares.
C) Sell 50 shares and purchase $3,000 of 8 percent debt (bonds).
D) Sell 8 percent of his stock and invest in bonds.
3) A stock return's beta measures
A) the stock's covariance with the risk-free asset.
B) the change in the stock's return for a given change in the market return.
C) the return on the stock.
D) the standard deviation on the stock's return.
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