1. During a recession, what is likely to happen to the risk premium? a. the risk...
1. During a recession, what is likely to happen to the risk premium?
a. the risk premium will be higher because there are fewer investment opportunities
b. the risk premium will be lower because there are fewer investment opportunities
c. the risk premium will be unchanged because the overall level of risk has not changed
d. the risk premium will be higher because the risk of default is greater
2. The risk-free rate is:
a. usually approximated by interest rates on U.S. government debt.
b. the interest rate at which one would lend if there were no risk of default.
c. lower than any other interest rate.
d. All of these are true.
3. Shares of stock are:
a. legal promises to repay a debt.
b. claims to partial ownership of a firm.
c. regular payments made to owners of a firm.
d. legal promises to make regular payments to the stockholder.
Homework Answers
1.
The answer is B-The risk premium will be lower because there are few investment opportunities.
During downturns, as organization income fall and financial specialists become more hazard opposed, stock costs modify descending, which raises anticipated returns. ... On the other hand, financial specialists will acknowledge a lower expected return when they view stocks as less dangerous comparative with money.
2.
The answer is B-the interest rate at which one would lend if there were no risk of default.
The risk-free pace of return is the hypothetical pace of return of speculation with zero risks. The hazard free rate speaks to the premium a speculator would anticipate from a totally chance free venture over a predetermined timeframe.
3.
The answer is B-claims to partial ownership of firms.
Shares, frequently called stocks or portions of stock, speak to the value responsibility for organization split into units, with the goal that different individuals can possess a level of a business.
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