CFA Practice Question

There are 191 practice questions for this study session.

CFA Practice Question

The risk of a preferred stock is based on the uncertainty of its ______.
A. dividends
B. price
C. total return
Explanation: The total return includes dividends and price change.

User Contributed Comments 8

User Comment
NNikolaiss But there is no uncertainty regarding dividends, it's guarantied.
jayj001 agreed
swisha Dividends are guaranteed but not in the same way as coupon payments for debt. There is always the risk that the company may not be able to meet its dividends obligation for its preferred shareholders.
viruss swisha, there is no guarantee about coupon payments either... it is exactly the same problem than for prefered shares. Saying that there is uncertainty about total return is equivalent to saying there is uncertainty about price considering that dividend are fixed for this kind of security ...
makatang Viruss you are only part correct about both being preferred shares and debt not guaranteed payments but at the same time payments to debt comes first before preferred shares so therefore I would assume coupon payments to debt is more "guaranteed" than preferred shares
gill15 You guys didnt read the answer. Total Return INCLUDES it`s dividend and price change.

A is included within C. There is dividend risk and price risk
gill15 Even considering what I just said -- I chose A and it`s wrong. I dont understand why price change is included. For preferred shared Po = Div divided by r. There is NO P1 in this equation and no capital appreciation.

I think it`s A but I guess I`m wrong.
renataa Gill15,
Payment or non payment of dividends will also affect the market share price. Regular dividends = most likely, good profitability = higher investors confidence/happy investors = demand up = market share price up... and vice versa
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