Why does stock issued by a company carry a higher rate of return because of______________?
Show answer Hide answer
Answer: B. High book to market ratio
Explanation
Firms with a high book to market ratio are often viewed as riskier, demanding a higher rate of return. Investors require higher expected returns to compensate for the perceived financial distress or lower growth of these firms. Value stocks typically exhibit high book to market ratios and historically command risk premiums in equity markets. The book to market ratio compares a company accounting book value directly to its total market capitalization. Fama and French asset pricing models incorporate book to market ratios to explain cross sectional stock returns. Firms with low book to market ratios are often growth companies commanding high valuations relative to assets.
Low market to book ratio is mathematically equivalent to a high book to market ratio but phrased differently. High market to book ratio characterizes growth stocks that typically offer lower required rates of return. Low book to market ratio describes growth oriented companies that investors price higher relative to book value.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
Related questions
Q1. If the standard deviation is 18% and the coefficient of variation is 1.5%, what will the expected rate of return be_____________?
Show answer Hide answer
Answer: B. 12%
The coefficient of variation is standard deviation divided by the expected return. Solving this gives 12%. Dividing the standard deviation of 18% by the coefficient of variation of 1.5 yields the expected return. This me...
Q2. What financial statement expresses every line item as a proportion of a total base figure:
Show answer Hide answer
Answer: A. a common-size statement
A common-size statement expresses every line item as a percentage of a chosen base figure. Financial analysts use total assets for balance sheets and total revenues for income statements. This standardization allows mean...
Q3. What illustrates the direct correlation between price changes and interest rate movements__________?
Show answer Hide answer
Answer: A. positive duration
Positive duration describes situations where bond prices and interest rates move in the same direction under specific pricing models. This specialized financial phenomenon challenges traditional inverse pricing assumptio...
Q4. If the standard deviation is 18% and expected return is 15.5%, what would the coefficient of variation be__________?
Show answer Hide answer
Answer: B. 1.16%
Coefficient of variation is calculated as standard deviation divided by expected return (18 / 15.5 = 1.16%). This ratio quantifies the amount of risk borne for every single unit of expected return. Standardizing risk rel...
Q5. Standard Company recorded net sales of Rs. 750,000 over the past year alongside average receivables of Rs. 150,000. Assuming a 365-day year, what was the average collection period?
Show answer Hide answer
Answer: D. 73 days
Average collection period is calculated by dividing average receivables by average daily sales. Daily sales equal total net sales of 750,000 divided by 365 days, yielding approximately 2054.79. Dividing average receivabl...
Q6. 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...