Essay on Financial Management
Indicate whether the statement is true or false.
____ 1. The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.
____ 2. The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.
____ 3. An individual stock's diversifiable risk, which is measured by the stock's beta, can be lowered by adding more stocks to the portfolio in which the stock is held.
____ 4. A firm can change its beta through managerial decisions, including capital budgeting and capital structure decisions. …show more content…
____ 23. R. E. Lee recently took his company public through an initial public offering. He is expanding the business quickly to take advantage of an otherwise unexploited market. Growth for his company is expected to be 40 percent for the first three years and then he expects it to slow down to a constant 15 percent. The most recent dividend (D0) was $0.75. Based on the most recent returns, the beta for his company is approximately 1.5. The risk-free rate is 8 percent and the market risk premium is 6 percent. What is the current price of Lee's stock? a. | $77.14 | b. | $75.17 | c. | $67.51 | d. | $73.88 | e. | $93.20 |
____ 24. An option that gives the holder the right to sell a stock at a specified price at some future time is a. | a call option. | b. | a put option. | c. | an out-of-the-money option. | d. | a naked option. | e. | a covered option. |
____ 25. An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options? a. | In-the-money | b. | Put | c. | Naked | d. | Covered | e. | Out-of-the-money |
____ 26. The current price of a stock is $50, the annual