Which of the Following Will Tend to Result in the Least

question 281

Multiple Choice

Which of the following will tend to result in the least variation in the expected real rate of return from the ownership of stocks?

• A) ownership of a single stock for a short period of time
• B) ownership of a single stock over a lengthy period of time
• C) ownership of stocks from a specific sector (for example, the automobile industry) over a lengthy period of time
• D) ownership of a diverse set of stocks (the Standard & Poor's 500, for example) over a lengthy period of time

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Definitions:

Noncallable Bond

A type of bond that cannot be redeemed by the issuer before its maturity date, thus offering investors protection against early repayment risks.

Annual Coupon

The yearly interest payment made to bondholders, expressed as a percentage of the bond's face value.

Bond-Yield-Plus-Risk-Premium

A method of estimating the cost of equity by adding a risk premium to the observed yield of a company’s long-term debt.

WACC

An assessment of a firm's cost of capital, where each category of capital is proportionally weighted to calculate the average cost.