4. Are the following statements true or false? Give brief but precise explanations for your answers. (a) Your friend tells you that when investing in bonds, you should invest in bonds that have higher yields to maturity because these bonds promise higher expected returns True, false or "it depends"? Explain. (b) Investors frequently talk about the dividend to price ratio (dividend yield, or D/P ratio). Some investors claim that stocks with higher D/P ratios should have higher expected returns. However, it is not possible for companies with higher D/P ration to have higher expected return if the CAPM holds. True, false or "it depends"? Explain. (c) The capital market line (CML) applies to both efficient and inefficient portfolios, and beta is the measure of market risk for both efficient and inefficient portfolios. True, false or "it depends"? Explain. (d) You conduct statistical analysis and identify a portfolio of stocks that has an expected return of 3% with a standard deviation of 10%. Moreover, you know that the market portfolio has an expected return of 5% with a standard deviation of 20%. The risk- free rate is a constant 0%. Based on this information you can tell that the CAPM does not hold in this economy. True, false or "it depends"? Explain. (e) For capital budgeting decision, we need to use the net present value (NPV) formula and evaluate project's certain cash flows using the appropriate risk-free discount rate. True, false or "it depends"? Explain.
4. Are the following statements true or false? Give brief but precise explanations for your answers. (a) Your friend tells you that when investing in bonds, you should invest in bonds that have higher yields to maturity because these bonds promise higher expected returns True, false or "it depends"? Explain. (b) Investors frequently talk about the dividend to price ratio (dividend yield, or D/P ratio). Some investors claim that stocks with higher D/P ratios should have higher expected returns. However, it is not possible for companies with higher D/P ration to have higher expected return if the CAPM holds. True, false or "it depends"? Explain. (c) The capital market line (CML) applies to both efficient and inefficient portfolios, and beta is the measure of market risk for both efficient and inefficient portfolios. True, false or "it depends"? Explain. (d) You conduct statistical analysis and identify a portfolio of stocks that has an expected return of 3% with a standard deviation of 10%. Moreover, you know that the market portfolio has an expected return of 5% with a standard deviation of 20%. The risk- free rate is a constant 0%. Based on this information you can tell that the CAPM does not hold in this economy. True, false or "it depends"? Explain. (e) For capital budgeting decision, we need to use the net present value (NPV) formula and evaluate project's certain cash flows using the appropriate risk-free discount rate. True, false or "it depends"? Explain.
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:4. Are the following statements true or false? Give brief but precise explanations for
your
answers.
(a) Your friend tells you that when investing in bonds, you should invest in bonds that
have higher yields to maturity because these bonds promise higher expected returns.
True, false or "it depends"? Explain.
(b) Investors frequently talk about the dividend to price ratio (dividend yield, or D/P
ratio). Some investors claim that stocks with higher D/P ratios should have higher
expected returns. However, it is not possible for companies with higher D/P ratios
to have higher expected return if the CAPM holds. True, false or "it depends"?
Explain.
(c) The capital market line (CML) applies to both efficient and inefficient portfolios, and
beta is the measure of market risk for both efficient and inefficient portfolios. True,
false or "it depends"? Explain.
(d) You conduct statistical analysis and identify a portfolio of stocks that has an expected
return of 3% with a standard deviation of 10%. Moreover, you know that the market
portfolio has an expected return of 5% with a standard deviation of 20%. The risk-
free rate is a constant 0%. Based on this information you can tell that the CAPM
does not hold in this economy. True, false or "it depends"? Explain.
(e) For capital budgeting decision, we need to use the net present value (NPV) formula
and evaluate project's certain cash flows using the appropriate risk-free discount rate.
True, false or "it depends"? Explain.
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