The Required Returns of Stocks X and Y Are RX

question 3

Multiple Choice

The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT?

• A) If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate.
• B) If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X.
• C) If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price.
• D) The stocks must sell for the same price.

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Definitions:

Halo Effect

A cognitive bias where an individual's overall impression of a person, brand, or product influences their feelings and thoughts about that entity's character or properties.

Positive Attribute

A desirable or beneficial characteristic or quality that a person or thing possesses.

Positive Traits

Characteristics of an individual that are viewed favorably and contribute to their overall effectiveness or well-being.

Racial Groups

Categories of humans based on shared physical or social qualities into groups generally viewed as distinct within a given society.