The Subjective Approach to Determining a Required Rate of Return

question 56

Multiple Choice

The subjective approach to determining a required rate of return for a stock includes
I. the rate of return on a long-term bond.
II. a risk premium for the perceived business risk of the asset.
III. a risk premium for assuming the risk of the market.
IV. the desired rate of return of the individual investor.

• A) I and III only
• B) II and IV only
• C) I, II and IV only
• D) I, II and III only

Understand and apply concepts of the complement of an event.

Comprehend and use the terminology specific to probability theory (experiment, sample space, event, outcome).

Calculate probabilities of complex events using fundamental probability rules.

Understand the concept and calculation of conditional probability.

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Definitions:

Operating Leverage

A measure of how sensitive a company's operating income is to changes in revenue, indicating the degree to which fixed costs affect profitability.

Sales Revenue

The total amount of money received by a company from its sales of goods or services before any expenses are subtracted.

DOL

Stands for Degree of Operating Leverage, which measures a company’s sensitivity of operating income to its sales.

EBIT

Earnings Before Interest and Taxes represent a company's profit before deducting expenses from interest and income taxes.