Fina 363 Final
The market portfolio has a beta of
1
Which of the following factors were used by Fama and French in their multifactor model? Excess return on the market index None of the factors were included in their model. Excess return of small stocks over large stocks Excess return of high book-to-market stocks over low book-to-market stocks All of the factors were included in their model.
All of the factors were included in their model.
Financial intermediaries exist because small investors cannot efficiently diversify their portfolios and assess credit risk of borrowers. advertise for needed investments. diversify their portfolios. assess credit risk of borrowers. All of the options.
All of the options.
The variance of a portfolio of risky securities Answer is the weighted sum of the securities' variances and covariances is a weighted sum of the securities' variances is the sum of the securities' covariances. is the sum of the securities' variances.
Answer is the weighted sum of the securities' variances and covariances
In the context of the Capital Asset Pricing Model (CAPM), the relevant measure of risk is
Beta
The ____ is an example of a U.S. index of large firms.
DJIA
WACC is the most appropriate discount rate to use when applying a ______ valuation model.
FCFF
Imposing the no-arbitrage condition on a single-factor security market implies which of the following statements? I) The expected return-beta relationship is maintained for all but a small number of well-diversified portfolios. II) The expected return-beta relationship is maintained for all well-diversified portfolios. III) The expected return-beta relationship is maintained for all but a small number of individual securities. IV) The expected return-beta relationship is maintained for all individual securities.
II and III
Of the following types of ETFs, an investor who wishes to invest in a diversified portfolio that tracks the Russell 2000 should choose QQQQ SPY DIA IWM VTI
IWM
Which of the following is true regarding a firm's securities? Preferred dividends are usually cumulative. Common dividends are paid before preferred dividends. Preferred dividends are contractual obligations. Common dividends can usually be paid if preferred dividends have been skipped. Preferred stockholders have voting rights.
Preferred dividends are usually cumulative.
Of the following types of ETFs, an investor who wishes to invest in a diversified portfolio that tracks the S&P 500 should choose SPY DIA QQQ VTI IWM
SPY
If you believe in the ________ form of the EMH, you believe that stock prices reflect all relevant information, including historical stock prices and current public information about the firm, but not information that is available only to insiders.
Semistrong
Which of the following orders instructs the broker to buy at or above a specified price?
Stop buy order
If you believe in the _________ form of the EMH, you believe that stock prices reflect all available information, including information that is available only to insiders.
Strong
Which statement is not true regarding the capital market line (CML)? The CML is the best attainable capital allocation line. The risk measure for the CML is standard deviation. The CML is the line from the risk-free rate through the market portfolio. The CML is also called the security market line. The CML always has a positive slope.
The CML is also called the security market line.
If the market prices of each of the 30 stocks in the Dow Jones Industrial Average (DJIA) all change by the same percentage amount during a given day, which stock will have the greatest impact on the DJIA?
The stock trading at the highest dollar price per share
If the market prices of each of the 30 stocks in the Dow Jones Industrial Average (DJIA) all change by the same percentage amount during a given day, which stock will have the greatest impact on the DJIA? The stock having the greatest amount of equity in its capital structure The stock trading at the highest dollar price per share The stock having the greatest amount of debt in its capital structure The stock having the lowest volatility
The stock trading at the highest dollar price per share
If you believe in the _______ form of the EMH, you believe that stock prices only reflect all information that can be derived by examining market trading data, such as the history of past stock prices, trading volume or short interest.
Weak
The ultimate stock index in the U.S. is the
Wilshire 5000
An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit.
Zero
The Dow Jones Industrial Average (DJIA) is computed by adding the prices of the 30 stocks in the index and dividing by a divisor. adding the prices of the 500 stocks in the index and dividing by a divisor. adding the prices of 30 large "blue-chip" stocks and dividing by 30. adding the prices of the 30 stocks in the index and dividing by the value of these stocks as of some base date period. calculating the total market value of the 30 firms in the index and dividing by 30.
adding the prices of the 30 stocks in the index and dividing by a divisor.
Which of the following is true regarding equity mutual funds? I) They invest primarily in stock.II) They may hold fixed-income securities, as well as stock.III) Most hold money market securities, as well as stock. IV) Two types of equity funds are income funds and growth funds.
all
Which of the following is true regarding equity mutual funds? I) They invest primarily in stock.II) They may hold fixed-income securities, as well as stock.III) Most hold money market securities, as well as stock. IV) Two types of equity funds are income funds and growth funds.
all
In calculating the Standard and Poor's stock price indices, the adjustment for stock split occurs
automatically.
In calculating the Standard and Poor's stock price indices, the adjustment for stock split occurs by adjusting the divisor. automatically. quarterly on the last trading day of each quarter. by adjusting the numerator.
automatically.
Music Doctors has a beta of 2.25. The annualized market return yesterday was 12%, and the risk-free rate is currently 4%. You observe that Music Doctors had an annualized return yesterday of 15%. Assuming that markets are efficient, this suggests that
bad news about Music Doctors was announced yesterday.
An overpriced security will plot
below the security market line.
The risk premium for common stocks must always be positive, in theory. cannot be zero, for investors would be unwilling to invest in common stocks. is negative, as common stocks are risky. cannot be zero, for investors would be unwilling to invest in common stocks and is negative, as common stocks are risky. cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory
cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory
The weather report says that a devastating and unexpected freeze is expected to hit Florida tonight during the peak of the citrus harvest. In an efficient market, one would expect the price of Florida Orange's stock to
drop immediately
Financial assets permit all of the following except elimination of risk. separation of ownership and control consumption timing. allocation of risk.
elimination of risk.
onsider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global-minimum variance portfolio has a standard deviation that is always greater than zero. equal to the sum of the securities' standard deviations. equal to 1. equal to zero.
equal to zero.
The weak form of the efficient-market hypothesis asserts that
future changes in stock prices cannot be predicted from past prices, and technicians cannot expect to outperform the market.
Google has a beta of 1.0. The annualized market return yesterday was 11%, and the risk-free rate is currently 5%. You observe that Google had an annualized return yesterday of 14%. Assuming that markets are efficient, this suggests that
good news about Google was announced yesterday.
Matthews Corporation has a beta of 1.2. The annualized market return yesterday was 13%, and the risk-free rate is currently 5%. You observe that Matthews had an annualized return yesterday of 17%. Assuming that markets are efficient, this suggests that
good news about Matthews was announced yesterday.
High P/E ratios tend to indicate that a company will _______, ceteris paribus.
grow quickly
Steve is more risk-averse than Edie. On a graph that shows Steve and Edie's indifference curves, which of the following is true? Assume that the graph shows expected return on the vertical axis and standard deviation on the horizontal axis. I) Steve and Edie's indifference curves might intersect. II) Steve's indifference curves will have flatter slopes than Edie's. III) Steve's indifference curves will have steeper slopes than Edie's. IV) Steve and Edie's indifference curves will not intersect. V) Steve's indifference curves will be downward sloping, and Edie's will be upward sloping.
i and iii
Which of the following are characteristics of preferred stock? I) It pays its holder a fixed amount of income each year at the discretion of its managers. II) It gives its holder voting power in the firm. III) Its dividends are usually cumulative. IV) Failure to pay dividends may result in bankruptcy proceedings.
i iii
Of the following types of mutual funds, an investor who wishes to invest in a diversified portfolio of foreign stocks (excluding the U.S.) should choose regional funds. global funds. emerging-market funds. international funds.
international funds.
Nicholas Manufacturing just announced yesterday that its fourth quarter earnings will be 10% higher than last year's fourth quarter. Nicholas had an abnormal return of -1.2% yesterday. This suggests that
investors expected the earnings increase to be larger than what was actually announced.
QQAG just announced yesterday that its fourth quarter earnings will be 35% higher than last year's fourth quarter. You observe that QQAG had an abnormal return of -1.7% yesterday. This suggests that
investors expected the earnings increase to be larger than what was actually announced.
Music Doctors just announced yesterday that its first quarter sales were 35% higher than last year's first quarter. You observe that Music Doctors had an abnormal return of -2% yesterday. This suggests that
investors expected the sales increase to be larger than what was actually announced.
LJP Corporation just announced yesterday that it would undertake an international joint venture. You observe that LJP had an abnormal return of 3% yesterday. This suggests that
investors view the international joint venture as good news.
The expected return of a portfolio of risky securities is the weighted sum of the securities' variances and covariances. None of the options are correct. is the sum of the securities' returns. is a weighted average of the securities' returns. is a weighted average of the securities' returns and the weighted sum of the securities' variances and covariances.
is a weighted average of the securities' returns.
The ______ is a common term for the market consensus value of the required return on a stock.
market capitalization rate
QQAG has a beta of 1.7. The annualized market return yesterday was 13%, and the risk-free rate is currently 3%. You observe that QQAG had an annualized return yesterday of 20%. Assuming that markets are efficient, this suggests that
no significant news about QQAG was announced yesterday.
In the mean-standard deviation graph, an indifference curve has a ________ slope. Cannot be determined. zero negative vertical positive
positive
If stock prices follow a random walk,
price changes are random.
You purchased JNJ stock at $50 per share. The stock is currently selling at $65. Your gains may be protected by placing a
stop loss order.
Initial margin requirements are determined by
the Federal Reserve System.
The Food and Drug Administration (FDA) just announced yesterday that they would approve a new cancer-fighting drug from King. You observe that King had an abnormal return of 0% yesterday. This suggests that
the approval was already anticipated by the market.
The standard deviation of a two-asset portfolio is a linear function of the assets' weights when the assets have a correlation coefficient equal to zero. the assets have a correlation coefficient less than one. the assets have a correlation coefficient greater than zero. the assets have a correlation coefficient less than zero. the assets have a correlation coefficient equal to one.
the assets have a correlation coefficient equal to one.
The holding-period return (HPR) on a share of stock is equal to the change in stock price. the capital gain yield during the period plus the inflation rate. the dividend yield plus the risk premium. the current yield plus the dividend yield. the capital gain yield during the period plus the dividend yield.
the capital gain yield during the period plus the dividend yield.
Portfolio theory as described by Markowitz is most concerned with the elimination of systematic risk. active portfolio management to enhance returns. the effect of diversification on portfolio risk. the identification of unsystematic risk.
the effect of diversification on portfolio risk.
The standard deviation of a portfolio of risky securities is the square root of the weighted sum of the securities' variances. the square root of the weighted sum of the securities' variances and covariances. the square root of the sum of the securities' covariances. the square root of the sum of the securities' variances.
the square root of the weighted sum of the securities' variances and covariances.
A reward-to-volatility ratio is useful in understanding how returns increase relative to risk increases. None of the options are correct. assessing the effects of inflation. analyzing returns on variable-rate bonds. measuring the standard deviation of returns.
understanding how returns increase relative to risk increases.
An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit. positive None of the options are correct. negative zero All of the options.
zero