Holding Risk Constant, an Investor Earning 4% from a Tax-Exempt

question 39

Multiple Choice

Holding risk constant, an investor earning 4% from a tax-exempt bond who is in a 20% tax bracket would be indifferent between that bond and:

• A) A taxable bond with a 7.5% yield
• B) A taxable bond with a 8.0% yield
• C) A taxable bond with a 5% yield
• D) A taxable bond with a 6% yield

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Definitions:

Beta

Beta is a measure of a stock's volatility in relation to the overall market, indicating the stock's risk compared to that of the market.

Market Portfolio

A theoretical bundle of investments that includes every type of asset available in the market, with each asset weighted according to its total market value.

Beta

A measure of a security's volatility in relation to the market, indicating its relative riskiness.

Arbitrage Pricing Theory

A theory that describes how the price of assets or securities is determined through the relationship to several risk factors or theoretical market indices.