The Market Expected Return Is 14% with a Standard Deviation

question 80

Multiple Choice

The market expected return is 14% with a standard deviation of 12%.The risk-free rate is 5.5%.Security A has just paid a dividend of $1.50, which is expected to grow at a rate of 10% per year indefinitely.What is the current price of Security A if it has a beta of 1.4?

• A)$9.93
• B)$10.93
• C)$20.27
• D)$22.30

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Definitions:

Income Effect

A person’s willingness to give up some income in exchange for more leisure time.

Substitution Effect

If the price of a resource, say labor, goes up, business firms tend to substitute capital or land for some of their now-expensive workers. Also, the substitution of more hours of work for leisure time as the wage rate rises.

Substitution Effect

The economic principle that as prices rise, consumers will replace costlier items with less expensive alternatives, holding the utility they receive constant.

Manufacturing Wage Rates

The amount of remuneration or earnings per unit of time by workers in the manufacturing sector.