The Risk-Free Rate Is 5% and the Expected Return on a Stock

question 8

Multiple Choice

The risk-free rate is 5% and the expected return on a stock is 12%. A derivative can be valued by: choose one)

• A) Assuming that the expected growth rate for the stock price is 13% and discounting the expected payoff at 12%
• B) Assuming that the expected growth rate for the stock price is 5% and discounting the expected payoff at 12%
• C) Assuming that the expected growth rate for the stock price is 5% and discounting the expected payoff at 5%
• D) Assuming that the expected growth rate for the stock price is 13% and discounting the expected payoff at 5%

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Definitions:

Price Discrimination

A pricing strategy that charges customers different prices for the same product or service based on what the seller thinks they can get the customer to agree to.

Elastic Demand

A situation where the quantity demanded of a good or service changes significantly as its price changes.

Oligopoly

A market structure in which a small number of firms dominate the market, leading to limited competition.

Market Demand Curve

A graph showing the relationship between the price of a good and the quantity demanded by all consumers in the market.