Equity Contracts

question 14

Multiple Choice

Equity contracts

• A)are claims to a share in the profits and assets of a business.
• B)have the advantage over debt contracts of a lower costly state verification.
• C)are used much more frequently to raise capital than are debt contracts.
• D)are not subject to the moral hazard problem.

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Definitions:

Risky Asset

An asset that has a significant degree of risk associated with it, offering the potential for higher returns in exchange for the increased risk.

Standard Deviation

A statistic that measures the dispersion of a dataset relative to its mean and is used in finance to gauge the amount of historical volatility of an investment.

Risk-Free Asset

An investment that is expected to return its principal and interest with near certainty, such as government bonds from stable countries.

Risky Asset

An investment that has a significant degree of uncertainty in its returns.