Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Question
Chapter 9.A, Problem 2TY
To determine
From which company the investor can earn more.
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Why do most investors hold diversified portfolios?
Suppose you are considering buying
$5,000 worth of Canada savings bonds
(risk-free) and a portfolio of perfectly risk-
balanced stocks so that the portfolio is also
"risk-free". The stocks portfolio is "risk-free"
because it has some stocks that rise in
value during a recession (such as
McDonald's, chocolate bars, etc.) and
some stocks that fall in value during a
recession (Samsung, Tesla, etc.) Both
choices offer to pay a 5% annual return.
However, you also know that 100% of
interest income from bonds is taxed as
regular income while only 50% of stock
income is taxed as regular income. The
discount rate you use to evaluate the
stocks portfolio should be
a. Equal to 5%
b.
Higher than 5%
c. Lower than 5%
d. Equal to your income tax rate.
Is common stocks or bonds best for a high risk firm? Why?
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