You Own Three Securities

question 12

Multiple Choice

You own three securities.Security A has an expected return of 11 percent as compared to 14 percent for Security B and 9 percent for Security C.The expected inflation rate is 4 percent and the nominal risk-free rate is 5 percent.Which one of the following statements is correct?

• A) There is no risk premium on Security C.
• B) The risk premium on Security A exceeds that of Security B.
• C) Security B has a risk premium that is 50 percent greater than Security A's risk premium.
• D) The risk premium on Security C is 5 percent.
• E) All three securities have the same expected risk premium.

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Definitions:

Common Stock Dividends Distributable

A liability account representing the amount of dividends declared by a corporation on common stock that have not yet been paid to stockholders.

Paid-in Capital

The total amount of money and other assets that shareholders have given a company in exchange for shares of stock.

Stockholders' Equity Section

The portion of the balance sheet that represents the ownership interest of shareholders in a company.

Date of Record

The specific date on which a company determines the eligible shareholders for receiving dividends or other corporate distributions.