Assume That an Investor Is Offered a Choice of a Risk-Free

question 9

Multiple Choice

Assume that an investor is offered a choice of a risk-free government bond that is expected to return 3.5% or a high-risk corporate stock.According to one of the principles of finance,what would induce the investor to purchase the corporate stock?

• A) a return that is substantially lower than 3.5%
• B) cash dividends
• C) a return that is substantially higher than 3.5%
• D) none of the above

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Definitions:

Annuity A

Represents a financial product that promises to pay the holder a fixed stream of payments over a specified period of time.

APR

Annual Percentage Rate, a measure used to calculate the cost of borrowing, including interest and other fees, shown as a yearly rate.

EAR

Ear is the acronym for Effective Annual Rate, which measures the real return on an investment or the real interest rate on a loan, accounting for compounding over a specified period.

Monthly Stream

A monthly stream often refers to consistent or recurring flows of income, payments, or data that occur every month.