BUS1 173A HW 1 Answers
Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific" or "unsystematic" events, and their effects on investment risk can be diversified away.
True
If investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10. However, if stocks are held in portfolios, it is possible that the required return could be higher on the stock with the low standard deviation.
True
In most cases, the preexisting shareholders are subject to a 180-day lockup; they cannot sell their shares for 180 days after the IPO.
True
In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value."
True
Market risk refers to the tendency of a stock to move with the general stock market. A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0.
True
Stock A's beta is 1.9 and Stock B's beta is 0.9. According to the CAPM, the expected return on Stock A will be greater than that on B.
True
On average, IPOs appear to be
underpriced
Which of the following organization forms accounts for the greatest number of firms?
Sole proprietorship
The intercept point of the security market line is the rate of return which corresponds to:
The risk-free rate of return
Which of the following statements concerning the variance are correct? (note: there can be more than one correct answer)
-The variance is the best measure of risk for an asset held in isolation. -If a stock portfolio is well diversified, then the portfolio variance may be less than the variance of the least risky stock in the portfolio. -The larger the variance, the more the actual returns tend to differ from the average return. -The larger the variance, the greater the total risk of the investment.
The distinguishing feature of a corporation is that:
it is a legally defined, artificial being, separate from its owners.
Which of the following organization forms for a business does NOT avoid double taxation?
Corporation
A "road trip" is where senior management and the lead underwriters travel around the country (and sometimes around the world) promoting the company and explaining their rationale for the offer price to the underwriters' largest customers-mainly institutional investors such as mutual funds and pension funds.
False
A stock with a beta equal to −1.0 has zero systematic (or market) risk.
False
A stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio.
False
Corporations generally find it relatively difficult to raise large amounts of capital.
False
In a firm commitment IPO, the underwriter purchases the entire issue at the offer price and then resells it at a slightly higher price to interested investors.
False
Which of the following organization forms accounts for the greatest number of firms?
False
When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk.
True
A stock with an actual return that lies above the security market line:
has yielded a higher return than expected for the level of risk assumed
