Stock X Has a Beta of

question 44

Multiple Choice

Stock X has a beta of .88 and an expected return of 10.8%. Stock Y has a beta of 1.15 and an expected return of 13.1%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?

• A)1.10%
• B)1.20%
• C)2.06%
• D)3.30%
• E)3.50%

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Definitions:

Tax Liability

The total amount of tax that an individual, corporation, or other entity is legally obligated to pay to an authority as the result of the occurrence of a taxable event.

Target Capital Structure

The ideal mix of debt, preferred equity, and common equity that a firm aims to achieve to minimize cost of capital.

Shareholder Value

The return on investment that shareholders receive from a company, including dividends and stock price appreciation.

Volatility of Earnings

The degree of variation of a company's earnings over a specified period, indicating the predictability or stability of its income.