In Comparing the Constant Growth Model and the Capital Asset

question 3

Multiple Choice

In comparing the constant growth model and the capital asset pricing model (CAPM) to calculate the cost of common stock equity,

• A) the constant growth model ignores risk, while the CAPM directly considers risk as reflected in the beta.
• B) the CAPM directly considers risk as reflected in the beta, while the constant growth model uses the market price as a reflection of the expected risk-return preference of investors.
• C) the CAPM directly considers risk as reflected in the beta, while the constant growth model uses dividend expectations as a reflection of risk.
• D) the CAPM indirectly considers risk as reflected in the market return, while the constant growth model uses dividend expectations as a reflection of risk.

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Definitions:

Negative Reinforcement

A behavioral principle where the removal of an unfavorable condition strengthens a desired behavior.

Conditioned Stimulus

Conditioned stimulus is a previously neutral stimulus that, after becoming associated with an unconditioned stimulus, eventually comes to trigger a conditioned response.

Neutral Stimulus

An initially inactive stimulus that, through association, acquires the capacity to evoke a conditioned response.

Higher Order Conditioning

A process in behavioral psychology where a conditioned stimulus is paired with a new neutral stimulus, creating a second-level conditioned response.