18) Which of the following statements is false: A) The expectations hypothesis of the term structure of interest rates states that the long-term interest rate should be approximately equal to the sum of expected short-term interest rates over the contract horizon. B) The Gordon Growth Formula predicts that the price-dividend ratio fluctuates due to changes in interest rate and/or dividend growth rate. C) Fluctuations in the stock market depend only on investor expectations of future dividends. D) Bank runs can sometimes be prevented through deposit insurance. E) If the term structure of interest rates does not change, the price of zero-coupon bonds will increase over time.

18) Which of the following statements is false: A) The expectations hypothesis of the term structure of interest rates states that the long-term interest rate should be approximately equal to the sum of expected short-term interest rates over the contract horizon. B) The Gordon Growth Formula predicts that the price-dividend ratio fluctuates due to changes in interest rate and/or dividend growth rate. C) Fluctuations in the stock market depend only on investor expectations of future dividends. D) Bank runs can sometimes be prevented through deposit insurance. E) If the term structure of interest rates does not change, the price of zero-coupon bonds will increase over time.

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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Similar questions

The below question is of the course "Financial Derivatives and Risk Management". 1. Explain the call-put parity relation and how it is justified. 2. Describe the five variables like Stock Price, Exercise Price, Risk-Free Rate, Volatility or Standard Deviation, and Time to Expiration that the Black-Scholes-Merton Formula uses to calculate the price of call and put options. 3. Explain how the change in these variables like Stock Price, Exercise Price, Risk-Free Rate, Volatility or Standard Deviation, and Time to Expiration affect the price of the option. 4. Explain how these variables like Stock Price, Exercise Price, Risk-Free Rate, Volatility or Standard Deviation, and Time to Expiration are grouped to show the put-call parity relationship and suggest the condition in which there is an arbitrage opportunity
Question 2 (a) Evaluate the following statement: "Two stocks should be viewed as equally risky because they have the same standard deviation." (b) Suppose that the relevant equilibrium model is the CAPM with unlimited borrowing and lending at a riskless rate of interest. Assuming, you discovered a security that was located below the security market line. (i) What would you conclude about the pricing of this particular security? (ii) Describe any changes you would expect to occur in its price. (c) Suppose that the relevant equilibrium model is CAPM with unlimited borrowing and lending at a riskless rate of interest. Compute the missing values (a*, b*, c*, d*, e*) in the following table, showing all intermediate steps. Expected Standard Residual Variance Asset Return Deviation Beta A 0.1 a* 0 B b* 2 0.49 C d* 1 0 D e* 0 0.36 0.08 0.12 c* 0.05
Which of the following will (holding everything else constant) cause the price earnings (P/E) ratio of a stock to decrease: The required return increases The risk-free rate decreases The stock's beta decreases The required return decreases
b) "If a stock had high returns so far, it will have low returns in the future". Discuss whether this statement is true or false, based on the knowledge of the different theories and models out there.
If the forward rate is expected to be an unbiased estimate of the future spot rate, and interest rate parity holds, then: a. the international Fisher effect (IFE) is refuted. b. the international Fisher effect (IFE) is supported. c. covered interest arbitrage is feasible. d. the average absolute error from forecasting would equal zero.
please answer both. If a stock's fair return increases, what will happen to the stock's value? A. It will increase. B. It will not change. C. It will decrease. If the market risk premium rises, what will happen to the stock's price? A. It will not change. B. It will increase. C. It will decrease.
An increase in a firms inclination to pay dividends may be because of a decline in profitable investment opportunities in the future. is this true or false and why. relevant or not, frequent changes in dividend policy can harm a firm. is this true or false and why. what is the essential feature of a forward contract that makes a futures contract a type of forward contract,
If the intrinsic value of a stock is greater than its market value, which of the following is a reasonable conclusion? O 1. The stock offers a high dividend payout ratio. O 2. The market is overvaluing the stock. O 3. The stock has a low level of risk. O 4. The market is undervaluing the stock.
Question 1. Let St be the current price of a stock that pays no dividends. a)Let rbid be the interest rate at which one can invest/lend money, and roff be theinterest rate at which one can borrow money, rbid≤roff. Both rates are continuously compounded. Using arbitrage arguments, find upper and lower bounds for the forwardprice of the stock for a forward contract with maturity T > t. b)How does your answer change if the stock itself has bid price St,bid and offer price St,off?
Based on the CAPM model, a stock with a negative beta has which of the following characteristics? A. An expected return less than zero. B. An expected return equal to the risk-free rate. C. Since these are so rare, the CAPM model does not account for negative beta stocks. D. An expected return less than the risk-free rate.
The “market RISK premium”
Suppose we observe from market data that, for a given non-dividend paying stock, F, ± Soer. What might explain the inequality in this relationship (i.e. why don't we observe Fo = Soer") if markets are efficient? Hint: try to identify real-world market frictions that might cause cases where F, + S,e! does not result in arbitrage opportunities rT

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