13 May WHICH OF THE FOLLOWING STATEMENTS IS FALSE?
Which of the following statements is FALSE?
A momentum strategy is one where you buy stocks that have had low past returns and (short) sell stocks that have had high past returns. If the market portfolio is not efficient, then a portfolio of small stocks will likely have positive alphas. Over the years since the discovery of the CAPM, it has become increasing clear to researchers and practitioners alike that forming portfolios based on market capitalization, book-to-market ratios, and past returns, one can construct trading strategies that have a positive alpha. Portfolios containing firms with the highest realized returns over the previous six months have positive alphas over the next six months.7. Which of the following statements is FALSE?
Many practitioners analyze other financial characteristics of a firm, when they forecast betas. When using historical returns to forecast future betas, we must be mindful of changes in the environment that might cause the future to differ from the past. If a firm where to change industries, using its historical beta would be inferior to using the beta of other firms in the new industry. U.S. Treasuries are never subject to interest rate risk unless we select a maturity equal to our investment horizon.6. If a project has a higher proportion of fixed to variable costs, holding the risk of its revenues constant
its beta will be higher, hence its cost of capital will be higher. its beta will be unaffected, since beta does not measure the sensitivity of the project’s cash flows to market risk. its beta will be lower, hence its cost of capital will be lower. its financial leverage will be higher.5. RON Ltd has the following capital structure components:Five million shares issued with a current market price of 5. Equity holders require a 8% return.$10 million face value of Corporate bonds outstanding. These bonds pay an annual coupon of 6% and currently trade at a yield to maturity of 6%.If the firm faces a corporate tax rate of 30%, compute RON Ltd’s Weighted Average Cost of Capital (WACC). Enter your answer in decimal form to FOUR decimal places. For example 10.34%, would be entered as 0.10342. Which of the following statements is FALSE?
Beta corresponds to the slope of the best fitting line in the plot of the securities excess returns versus the market excess return. Securities whose returns tend to move in tandem with the market on average have a beta of 1. Securities that tend to move more than the market have betas higher than 0. The statistical technique that identifies the best-fitting line through a set of points is called linear regression. 4. Consider the following information regarding corporate bonds:RatingAAAAAABBBBBBCCCAverage Default Rate0.0%0.0%0,2%0,4%2.1%5.2%9.9%Recession Default Rate0.0%1.0%3.0%3.0%8.0%16.0%43.0%Average Beta0.050.050.050.100.170.260.31CompanyMarket Capitalisation ($mm)Total Enterprise Value ($mm)Equity BetaDebt RatingTaggart Transcontinental$4,5008,0001.1BBBRearden Metal$3,8007,2001.3AAAWyatt Oil$2,4003,8000.9ANielson Motors$1,5004,4001.75BBYour estimate of the asset beta for Wyatt Oil is closest to:
0.71 0.42 0.59 0.669. Which of the following statements is FALSE?
7. Which of the following statements is FALSE?
5. RON Ltd has the following capital structure components:If the firm faces a corporate tax rate of 30%, compute RON Ltd’s Weighted Average Cost of Capital (WACC). Enter your answer in decimal form to FOUR decimal places. For example 10.34%, would be entered as 0.10342. Which of the following statements is FALSE?
4. Consider the following information regarding corporate bonds:Your estimate of the asset beta for Wyatt Oil is closest to:
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