FINANCE FINAL

Which of the following is NOT true regarding common stock?

Common stock, unlike bond principal, does not mature. (answer) Dividend payments, like interest payments, are fixed. Dividends, unlike interest payments, are not tax deductible. Common stockholders are owners of the firm, whereas bondholders are creditors.

As the required rate of return of an investment decreases, the market price of the investment decreases.

FALSE

Proper diversification generally results in the elimination of risk.

FALSE

According to the CAPM, for each unit (1.0) of Beta an asset's required rate of return increases by the market's risk premium.

TRUE

Beta is a measurement of the relationship between a security's returns and the general market's returns.

TRUE

In general, the required rate of return is a function of: (1) the time value of money, (2) the risk of an asset, and (3) the investor's attitude toward risk.

TRUE

The expected rate of return from an investment is equal to the expected cash flows divided by the initial investment

TRUE

The required rate of return for an asset is equal to the risk-free rate plus a risk premium.

TRUE

Total risk equals systematic (market) risk plus unsystematic (firm-specific) risk.

TRUE

Variation (volatility "means risk") in the rate of return of an investment is a measure of the riskiness of that investment.

TRUE