Financial Management

✅ The correct answer is A.
Bond risk premium = Cost of common stock – Bond Yeild
= 16% – 9% = 7%.

✅ The correct answer is B.
Asset allocation affects the investor’s return by weighting the portfolio return by the allocation. Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon.

✅ The correct answer is D.
Difference between actual return on stock and predicted return is considered as random error. Random error causes one measurement to differ slightly from the next. It comes from unpredictable changes during an experiment.

✅ The correct answer is C.
Preferred dividend is divided for required rate of return to calculate value of preferred stock. The value of a preferred stock equals the present value of its future dividend payments discounted at the required rate of return of the stock. In most cases the preferred stock is perpetual in nature, hence the price of a share of preferred stock equals the periodic dividend divided by the required rate of return.

✅ The correct answer is C.
According to Markowitz, an efficient portfolio is one that has the largest expected return for a given level of risk. This theory was pioneered by Harry Markowitz in his paper “Portfolio Selection,” published in 1952 by the Journal of Finance.

✅ The correct answer is A.
Process of selling company stock at large to general public and get lending from banks is classified as an initial public offering. An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors.

✅ The correct answer is D.
Past realized rate of return in period t is denoted by r bar t. The letter R has a different meaning when applied as part of financial formula where it usually means some form of return.

✅ The correct answer is D.
They enjoy a high order of priority in the event of liquidation, Stable rate of return and No risk are the factors which make debentures attractive to investors.

✅ The correct answer is A.
Operating Leverage is the response of changes in EBIT to the changes in sales. Operating leverage is a cost-accounting formula that measures the degree to which a firm or project can increase operating income by increasing revenue.

✅ The correct answer is A.
An expected rate of return is subtracted from capital gains yield to calculate expected dividend yield. The dividend yield is the ratio of a company’s annual dividend compared to its share price.