Which of the Following Statements Is False

question 48

Multiple Choice

Which of the following statements is false?

• A) The option price is more sensitive to changes in volatility for at-the-money options than it is for in-the-money options.
• B) A share of stock can be thought of as a put option on the assets of the firm with a strike price equal to the value of debt outstanding.
• C) In the context of corporate finance, equity is at-the-money when a firm is close to bankruptcy.
• D) Because the price of equity is increasing with the volatility of the firm's assets, equity holders benefit from a zero-NPV project that increases the volatility of the firm's assets.

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Definitions:

Risk-free Rate

The anticipated earnings on an investment considered free from financial risk, usually related to sovereign bonds.

Arbitrage Opportunity

This refers to the chance to buy an asset at a low price in one market and simultaneously sell it at a higher price in another, realizing a profit without risk.

Expected Return

The weighted average of all possible returns from an investment, factoring in the probabilities of each outcome.

Firm-characteristic Variables

Factors specific to a company that can influence its stock price, such as size, earnings, and debt levels.