I. T A company\'s stock and bond returns are perfectly positively correlated. 2.
ID: 2783943 • Letter: I
Question
I. T A company's stock and bond returns are perfectly positively correlated. 2. TF A portfolio of two stocks always has lower standard deviation of returns than each stock individually 3. T F Between two bonds issued by the same company, if one has longer duration than another, then it will always have higher sensitivity to interest rates. 4. T F A risky stock needs to have higher expected return than the risk-free rate. 5. TF I If you delay paying your supplier, this would reduce your net working capital. T higher Sharpe ratio than the market portfolio. 6. F Even if CAPM is true, in equilibrium, there can be risky portfolios with 7. TF Implementing better corporate governance practices would be a source of agency cost. TF A bond is a discount bond if its YTM is higher than its coupon rate 8. 9. T CAPM proposes a linear relationship between a stock's actual return and F its market risk. 10. T F If CAPM is true, high book-to-market stocks must have higher beta than low book-to-market stocks.Explanation / Answer
1. False..No, company's stock returns and bond returns are not perfectly positively correlated. because bond is having fixed payments but stock does not have any fixed payments. Though they are both affected by interest rates, but they are not perfectly positively correlated
2. False. No, not always..If correlation between them is perfectly positve i.e, 1..Then the standard deviation is equal to the sum of two individual
3. True. Higher duration means higher sensitivity
4. True. To compensate for the risk, risky stock needs to provide more rreturns..As per CAPM, return=risk free+beta*market risk premium...As beta is greater than zero and market risk premium is greater than zero, return will be greater than risk free rate