The Index Model for Stock a Has Been Estimated with the Following

question 16

Multiple Choice

The index model for stock A has been estimated with the following result: R_A = 0.01 + 0.9R_M + e_A.
If σ_M = 0.25 and R²_A = 0.25, the standard deviation of return of stock A is

• A) 0.2025.
• B) 0.2500.
• C) 0.4500.
• D) 0.8100.

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Definitions:

Par Value

The face value of a bond or stock, as stated by the issuing company, which may differ from the market value.

Annual Coupon

The yearly interest amount paid to bondholders, typically expressed as a percentage of the bond's face value.

Default Risk Premium

The additional yield a lender demands to compensate for the risk that the borrower may default on the loan.

Liquidity Premium

Additional yield that investors demand for holding a security that is not easily traded or sold without a significant price reduction.