Which of the Following Statements Is FALSE

question 87

Multiple Choice

Which of the following statements is FALSE?

• A)The imperfections in the CAPM may be critical in the context of capital budgeting and corporate finance,where errors in estimating the cost of capital are likely to be far more important than small discrepancies in the project cash flows.
• B)To estimate the expected market risk premium,we can look at the historical average excess return of the market over the risk-free interest rate.
• C)The highest beta stocks have tended to underperform what the CAPM predicts.
• D)Given an assessment of an index's future cash flows,we can estimate the expected return of the market by solving for the discount rate that is consistent with the current level of the index.

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Definitions:

Straight Bond Value

The value of a bond that pays fixed interest payments until maturity and repays the principal amount without any embedded options, traded purely on interest rate and credit quality.

Convertible Bond

A convertible bond is a type of bond that the holder can convert into a specified number of shares of the issuing company, typically at certain times during its life.

Put Option

A financial contract giving the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specific time.

Option Buyer

An individual or entity that acquires the rights, but not the obligation, to buy or sell an asset at a predetermined price within a specific time frame.