Which of the Following Statements Is Correct

question 24

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 will be negatively correlated with returns on most other stocks in the market 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 very 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 rebalance your portfolio to include more high-beta stocks.

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Definitions:

Social Cost

The total cost to society as a whole due to an activity or decision, including both direct costs and indirect externalities.

Congested Highway

A highway or roadway that experiences traffic congestion due to a high volume of vehicles, often leading to slower speeds and longer travel times.

Negative Externality

A cost that affects a party who did not choose to incur that cost, often arising from production or consumption of goods and services.

Socially Optimal Quantity

The level of production or consumption that maximizes social welfare, considering all costs and benefits to society.