Which of the Following Statements Is CORRECT

question 67

Multiple Choice

Which of the following statements is CORRECT?

• A) Collections Inc. is in the business of collecting past-due accounts for other companies, i.e., it is a collection agency. Collections' revenues, profits, and stock price tend to rise during recessions. This suggests that Collections Inc.'s beta should be quite high, say 2.0, because it does so much better than most other companies when the economy is weak.
• B) Suppose the returns on two stocks are negatively correlated. One has a beta of 1.2 as determined in a regression analysis using data for the last 5 years, while the other has a beta of -0.6. The returns on the stock with the negative beta must have been negatively correlated with returns on most other stocks during that 5-year period.
• C) Suppose you are managing a stock portfolio, and you have information that leads you to believe the stock market is likely to be strong in the immediate future. That is, you are convinced that the market is about to rise sharply. You should sell your high-beta stocks and buy low-beta stocks in order to take advantage of the expected market move.
• D) You think that investor sentiment is about to change, and investors are about to become more risk averse. This suggests that you should re-balance your portfolio to include more high-beta stocks.
• E) If the market risk premium remains constant, but the risk-free rate declines, then the required returns on low-beta stocks will rise while those on high-beta stocks will decline.

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Definitions:

Acid-Test Ratio

A financial metric that measures a company's ability to pay off its current liabilities with its most liquid assets, excluding inventory.

Current Liabilities

Short-term financial obligations that are due within one year or within a company's operating cycle, whichever is longer.

Accounts Receivable Turnover

A financial ratio that measures how efficiently a company collects debts from its customers.

Acid-Test Ratio

A stringent indicator that measures a company's ability to cover its short-term liabilities with its most liquid assets, excluding inventory.