Suppose You Are Considering Purchasing Stock from Two Firms, Firm

question 40

Essay

Suppose you are considering purchasing stock from two firms, firm A and firm B. The expected return is the same for both stocks; however, the return on stock A is more variable than the return on stock B. Which stock would you buy? Why? What do you think other investors will do? What will be the effect of investors' behavior on the relative prices of these two stocks?

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Definitions:

Implied Service Contract

A legal agreement created by the actions, situation, or circumstances of the parties involved rather than written or spoken words.

Expense Warranty Accrual Method

An accounting practice where a company estimates the costs of warranties and records these costs as an expense when the corresponding sales are made.

Modified Cash Basis

An accounting method that combines elements of both cash and accrual accounting, recognizing revenues when they are received and expenses when they are paid, with some adjustments.

Warranty Revenue Recognition

The accounting process of recognizing revenue from warranties provided, typically over the period the warranty covers.