fin 3310 exam 2
The average risk premium on U.S. Treasury bills over the period of 1926 to 2011 was _____%.
0.0%
The majority of the benefits from portfolio diversification can generally be achieved with just _____ diverse securities.
30
The average annual return on small company stocks was about _____ percentage points greater than the average annual return on large-company stocks over the period of 1926 to 2011.
5
The correlation between two stocks:
All of these.
How much of total world stock market capitalization is from the United States in 2011?
Approximately 45%
The efficient set of portfolios:
Both contains the portfolio combinations with the highest return for a given level of risk; and contains the portfolio combinations with the lowest risk for a given level of return.
The diversification effect of a portfolio of two stocks:
Both increases as the correlation between the stocks declines; and decreases as the correlation between the stocks rises
Which country has the lowest stock market risk premium?
Denmark
Which of the following statements are correct concerning the variance of the annual returns on an investment
I. The larger the variance, the more the actual returns tend to differ from the average return. II. The larger the variance, the larger the standard deviation. III. The larger the variance, the greater the risk of the investment. IV. The larger the variance, the higher the expected return.
The standard deviation on small company stocks
I. is greater than the standard deviation on large company stocks. III. had an average value of about 33% for the period 1926 to 2011
The portfolio expected return considers which of the following factors?
I. the amount of money currently invested in each individual security II. various levels of economic activity III. the performance of each stock given various economic scenarios IV. the probability of various states of the economy
Which of the following statements concerning the standard deviation are correct
II. The standard deviation is a measure of volatility. III. The higher the standard deviation, the less certain the rate of return in any one given year. IV. The higher the standard deviation, the higher the expected return.
The closing price of a stock is quoted at 22.87, with a P/E of 26 and a net change of 1.42. Based on this information, which one of the following statements is correct?
The earnings per share are equal to 1/26th of $22.87.
Which one of the following statements is correct concerning the expected rate of return on an individual stock given various states of the economy?
The expected return is a weighted average where the probabilities of the economic states are used as the weights.
Which one of the following is a correct statement concerning risk premium?
The greater the volatility of returns, the greater the risk premium.
Which one of the following statements is correct concerning the standard deviation of a portfolio?
The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio.
Capital market history shows us that the average return relationship from lowest to highest between securities is:
Treasury bills, government bonds, corporate bonds, large common stocks, small company stocks.
The dollar value of the world stock market capitalization, from largest to smallest is:
United States, Europe, Japan, United Kingdom.
The systematic risk of the market is measured by:
a beta of 1.0
Which one of the following would indicate a portfolio is being effectively diversified?
a decrease in the portfolio standard deviation
A portfolio is:
a group of assets, such as stocks and bonds, held as a collective unit by an investor.
The expected return on a stock that is computed using economic probabilities is:
a mathematical expectation based on a weighted average and not an actual anticipated outcome
Differential growth refers to a firm that increases its dividend by:
a rate which is most likely not sustainable over an extended period of time
You have plotted the data for two securities over time on the same graph, i.e., the monthly return of each security for the last 5 years. If the pattern of the movements of each of the two securities rose and fell as the other did, these two securities would have:
a strong positive correlation
Which one of the following is an example of a nondiversifiable risk?
a well-respected chairman of the Federal Reserve suddenly resigns
If investors possess homogeneous expectations over all assets in the market portfolio, when riskless lending and borrowing is allowed, the market portfolio is defined to
all of these (be the same portfolio of risky assets chosen by all investors, have the securities weighted by their market value proportions, be a diversified portfolio)
Which one of the following is an example of unsystematic risk?
an oil tanker runs aground and spills its cargo
The return earned in an average year over a multi-year period is called the _____ average return.
arithmetic
The constant dividend growth model:
assumes that dividends increase at a constant rate forever and can be used to compute a stock price at any point of time.
Systematic risk is measured by:
beta
The relationship between the covariance of the security with the market to the variance is called the:
beta
Which one of the following measures is relevant to the systematic risk principle?
beta
Unsystematic risk
can be effectively eliminated through portfolio diversification
The rate at which a stock's price is expected to appreciate (or depreciate) is called the _____ yield.
capital gains
A form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called _____ stock.
common
The elements in the off-diagonal positions of the variance/covariance matrix are:
covariances.
The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the _____ model.
dividend growth
The total rate of return earned on a stock is comprised of which two of the following?
dividend yield and capital gains yield
Next year's annual dividend divided by the current stock price is called the:
dividend yield.
Payments made by a corporation to its shareholders, in the form of either cash, stock or payments in kind, are called
dividends
The beta of a security is calculated by:
dividing the covariance of the security with the market by the variance of the market.
The beta of an individual security is calculated by:
dividing the covariance of the security with the market by the variance of the market.
The primary purpose of portfolio diversification is to:
eliminate asset-specific risk.
If the correlation between two stocks is +1, then a portfolio combining these two stocks will have a variance that is
equal to the weighted average of the two individual variances.
The constant dividend growth model is:
generally not used in practice because most stocks grow at a non constant rate.
The average compound return earned per year over a multi-year period is called the _____ average return.
geometric
A stock with an actual return that lies above the security market line:
has yielded a higher return than expected for the level of risk assumed.
beta measures
how an asset covaries with the market
You are considering purchasing stock S. This stock has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period. The overall expected rate of return on this stock will:
increase as the probability of a boom economy increases.
The separation principle states that an investor will:
invest only in the riskless asset and tangency portfolio choosing the weights based on individual risk tolerance.
The expected return on a portfolio:
is limited by the returns on the individual securities within the portfolio.
Over the period of 1926 through 2011, the annual rate of return on _____ has been more volatile than the annual rate of return on _____.
large company stocks; long-term corporate bonds
The excess return earned by an asset that has a beta of 1.0 over that earned by a risk-free asset is referred to as the:
market risk premium.
The slope of an asset's security market line is the:
market risk premium.
When computing the expected return on a portfolio of stocks the portfolio weights are based on the
market value of the total shares held in each stock.
Assume that you are using the dividend growth model to value stocks. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect the:
market values of all stocks to decrease, all else constant.
If a stock portfolio is well diversified, then the portfolio variance:
may be less than the variance of the least risky stock in the portfolio
You have a portfolio of two risky stocks which turns out to have no diversification benefit. The reason you have no diversification is the returns
move perfectly with one another
The risk premium for an individual security is computed by:
multiplying the security's beta by the market risk premium.
The Scott Co. has a general dividend policy whereby it pays a constant annual dividend of $1 per share of common stock. The firm has 1,000 shares of stock outstanding. The company:
must still declare each dividend before it becomes an actual company liability.
A symmetric, bell-shaped frequency distribution that is completely defined by its mean and standard deviation is the _____ distribution.
normal
A security that is fairly priced will have a return _____ the Security Market Line.
on
Estimates using the arithmetic average will probably tend to _____ values over the long-term while estimates using the geometric average will probably tend to _____ values over the short-term.
overestimate; underestimate
The percentage of a portfolio's total value invested in a particular asset is called that asset's:
portfolio weight.
The standard deviation for a set of stock returns can be calculated as the:
positive square root of the variance.
A typical investor is assumed to be:
risk averse
The excess return required from a risky asset over that required from a risk-free asset is called the:
risk premium
The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the:
risk premium.
Diversification can effectively reduce risk. Once a portfolio is diversified the type of risk remaining is:
risk related to the market portfolio.
Diversification can effectively reduce risk. Once a portfolio is diversified, the type of risk remaining is:
risk related to the market portfolio.
The linear relation between an asset's expected return and its beta coefficient is the:
security market line.
Based on the period of 1926 through 2011, _____ have tended to outperform other securities over the long-term.
small company stocks
Which one of the following is a correct ranking of securities based on their volatility over the period of 1926 to 2011? Rank from highest to lowest.
small company stocks, large company stocks, long-term corporate bonds
The principle of diversification tells us that:
spreading an investment across many diverse assets will eliminate some of the risk
The variance of returns is computed by dividing the sum of the:
squared deviations by the number of returns minus one.
A portfolio of large company stocks would contain which one of the following types of securities?
stocks of firms included in the S&P 500 index
The risk premium is computed by ______ the average return for the investment.
subtracting the average return on the U.S. Treasury bill from
The market risk premium is computed by:
subtracting the risk-free rate of return from the market rate of return.
Risk that affects a large number of assets, each to a greater or lesser degree, is called _____ risk
systematic
Diversification will not lower the ____ risk:
systematic risk
The measure of beta associates most closely with:
systematic risk
Total risk can be divided into:
systematic risk and unsystematic risk.
The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.
systematic risk principle
A risk that affects a large number of assets, each to a greater or lesser degree is called:
systematic risk.
Which one of the following is an example of systematic risk?
the Federal Reserve increases interest rates
For a highly diversified equally weighted portfolio with a large number of securities, the portfolio variance is:
the average covariance.
The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in:
the capital market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio.
The discount rate in equity valuation is composed entirely of:
the dividend yield and the growth rate.
The Zolo Co. just declared that it is increasing its annual dividend from $1.00 per share to $1.25 per share. If the stock price remains constant, then
the dividend yield will increase.
An efficient set of portfolios is:
the dominant portion of the opportunity set.
The value of common stock today depends on:
the expected future dividends, capital gains and the discount rate.
When stocks with the same expected return are combined into a portfolio:
the expected return of the portfolio is equal to the weighted average expected return of the stocks.
According to the Capital Asset Pricing Model:
the expected return on a security is positively and linearly related to the security's beta.
According to the CAPM
the expected return on a security is positively related to the security's beta.
In estimating the future equity risk premium, it is important to include assumptions about:
the future risk environment and the amount of risk aversion of future investors
The dominant portfolio with the lowest possible risk is:
the minimum variance portfolio
The net present value of a growth opportunity, NPVGO, can be defined as:
the net present value per share of an investment in a new project.
The Capital Market Line is the pricing relationship between:
the optimal portfolio and the standard deviation of portfolio return.
In predicting the expected future return of the market, one of the dangers is that:
the past is not indicative of the future and the past period measured is too short to get a reasonable estimate of the future.
The standard deviation of a portfolio will tend to increase when:
the portfolio concentration in a single cyclical industry increases.
The underlying assumption of the dividend growth model is that a stock is worth
the present value of the future income which the stock generates
A capital gain occurs when
the purchase price is less than the selling price.
On average, for the period 1926 through 2011:
the risk premium on long-term corporate bonds has exceeded the risk premium on long-term government bonds.
A stock with a beta of zero would be expected to have a rate of return equal to:
the risk-free rate
The intercept point of the security market line is the rate of return which corresponds to:
the risk-free rate of return
Standard deviation measures _____ risk.
total
The capital gains yield plus the dividend yield on a security is called the:
total return
Risk that affects at most a small number of assets is called _____ risk.
unsystematic
A well-diversified portfolio has eliminated most of the:
unsystematic risk
As we add more securities to a portfolio, the ____ will decrease:
unsystematic risk
A well-diversified portfolio has negligible:
unsystematic risk.
The average squared difference between the actual return and the average return is called the:
variance.
The elements along the diagonal of the variance/covariance matrix are:
variances.