How are stocks with a high book-to-market ratio considered_____________?
Show answer Hide answer
Answer: A. More risky
Explanation
Stocks with a high book-to-market ratio are typically categorized as value stocks and considered riskier. Market pricing undervalues these firms relative to their accounting book value due to operational distress. Fama-French factor models incorporate the book-to-market ratio to capture systematic value risk premiums. Book-to-market ratio compares a company's net asset value to its total stock market capitalization. Value investing strategies focus on purchasing high book-to-market equities anticipating mean reversion. Higher risk premiums compensate investors for holding distressed or economically sensitive value stocks.
Equity analysts screen for high book-to-market stocks to construct value-oriented investment portfolios. Economic downturns can impact high book-to-market firms severely due to their structural industry risks. Institutional asset allocators balance growth and value factors to manage overall portfolio risk exposures. Less risky would incorrectly describe value stocks, which historically carry higher distress risk factors. Pessimistic describes investor sentiment rather than the objective accounting characteristic of the ratio. Optimistic characterizes growth stock investors who pay high multiples for future earnings potential.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
Related questions
Q1. What is calculated by dividing the standard deviation by the expected rate of return_________?
Show answer Hide answer
Answer: A. Coefficient of variation
The coefficient of variation is calculated by dividing the standard deviation by the expected rate of return. This statistical metric provides a standardized measure of risk per unit of expected return. It allows investo...
Q2. What do stocks exhibiting a higher correlation with the market tend to possess__________?
Show answer Hide answer
Answer: C. High beta, more risky
Stocks exhibiting high correlation with the broad market possess a high beta coefficient value. Beta measures the volatility and responsiveness of a specific stock relative to market movements. Higher beta values indicat...
Q3. For an investment, what is the weighted average time to maturity considered as ___________?
Show answer Hide answer
Answer: D. duration
Duration represents the weighted average time until an investment cash flows are received by the investor. This metric accounts for the timing and magnitude of all coupon and principal payments over the security life. Fi...
Q4. How is a bond's face value or stated value considered_____________?
Show answer Hide answer
Answer: B. Par value
The stated or nominal value of a bond is known as its par value. Issuers print this principal amount directly on the face certificate of traditional debt securities. Bondholders receive this exact stated amount when the...
Q5. What is the initial public offering step where hired agents act on behalf of owners classified as______________?
Show answer Hide answer
Answer: B. Agency problems
Agency problems occur when hired managers act as agents for owners whose interests may diverge. Management might prioritize personal compensation and job security over maximizing shareholder stock value. Corporate govern...
Q6. The administrative framework through which corporate entities are directed and supervised is known as:
Show answer Hide answer
Answer: C. Corporate Governance
Corporate governance provides the administrative framework and rules for directing and supervising corporate entities. This system balances the interests of various stakeholders including shareholders, management, custom...