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Question: Briefly (four sentences or less) explain why each of the following italicized statements is true, false, or uncertain.

A. Stock X and Stock Z both sell for $25, and neither company pays a dividend. Stock X has a Beta of 0.75 while Stock Z has a Beta of 1.25. If the market increases by 10% over the next year, it is likely (but not certain) that the price of Stock Z will be greater than the price of Stock X in one year.

B. If the market is semi-strong form efficient, it is very difficult for market participants to identify firms that will have superior operating performance (e.g., sales growth and profit margins) in the future.

C. Assume that Stock X and Stock Z both sell for $25, and neither company pays a dividend. Stock X has a Beta of 0.75 while Stock Z has a Beta of 1.25. There exists a call option with an exercise price of $25 on each individual stock; these options expire in six months. Because Stock Z has a higher beta, the call premium on the Stock Z option must exceed the call premium on the Stock X option.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M92787469

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