FIN 300 - Exam 3

Which of the following statements are true based on the historical record for 1926-2016?

Bonds are generally a safer, or less risky, investment than are stocks.

Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk?

Capital asset pricing model

Which one of the following statements related to unexpected returns is correct? A. All announcements by a firm affect that firm's unexpected returns. B. Unexpected returns over time have a negative effect on the total return of a firm. C. Unexpected returns are relatively predictable in the short-term. D. Unexpected returns generally cause the actual return to vary significantly from the expected return over the long-term. E. Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.

E. Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.

Generally speaking, which of the following best correspond to a wide frequency distribution?

High standard deviation, large risk premium

Which of the following statements concerning risk are correct? I. Non-diversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for non-diversifiable risk. IV. Diversifiable risks are market risks you cannot avoid.

I and III only

The common stock of Alpha Manufacturers has a beta of 1.24 and an actual expected return of 13.25 percent. The risk-free rate of return is 3.7 percent and the market rate of return is 11.78 percent. What is true given this information?

The actual expected stock return indicates the stock is currently overpriced.

Which one of the following is the best example of a diversifiable risk?

a firm's sales decrease

The return earned in an average year over a multiyear period is called the _____ average return.

arithmetic

Assume all stock prices fairly reflect all of the available information on those stocks. What term best defines the stock market under these conditions?

efficient capital market

The reward-to-risk ratio for Stock A is less than the reward-to-risk ratio of Stock B. Stock A has a beta of .82 and Stock B has a beta of 1.29. This information implies that:

either Stock A is overpriced or Stock B is underpriced or both.

The primary purpose of portfolio diversification is to:

eliminate asset-specific risk.

The average compound return earned per year over a multiyear period is called the _____ average return.

geometric

The dividend growth model:

is only as reliable as the estimated rate of growth.

What is represented by the slope of the security market line?

market risk premium

The weighted average cost of capital for a firm with debt is the:

rate of return a company must earn on its existing assets to maintain the current value of its stock.

The cost of preferred stock is computed the same as the:

rate of return on a perpetuity.

Assume that last year T-bills returned 2.8 percent while your investment in large-company stocks earned an average of 7.6 percent. What term refers to the difference between these two rates of return?

risk premium

The _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly.

risk premium

Which one of the following categories of securities had the most volatile annual returns over the period 1926-2016?

small-company stocks

Which one of the following earned the highest risk premium over the period 1926-2016?

small-company stocks

Small-company stocks, as the term is used in the textbook, are best defined as the:

smallest 20 percent of the companies listed on the NYSE

The principle of diversification tells us that:

spreading an investment across many diverse assets will eliminate some of the total risk.

The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than _____ form efficient.

strong

Which one of the following is a risk that applies to most securities?

systematic

What is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semistrong form efficient.

the information was expected

Efficient financial markets fluctuate continuously because:

the markets are continually reacting to new information.

The intercept point of the security market line is the rate of return which corresponds to:

the risk-free rate

Standard deviation is a measure of?

volatility