Finance Ch. 9 and exam 3 questions

stock market bubble

investor enthusiasm causes an inflated bull market that drives prices too high, ending in a dramatic collapse in prices

Nasdaq Stock Market

large electronic stock exchange

Dividend Yield

last four quarters of dividend income expressed as a percentage of the current stock price

probability distribution

list of possible outcomes with associated probabilities

required return

return necessary to induce an individual to make an investment. (Risk free rate + Risk premium)

Risk Premium

reward for bearing risk

market risk

risk that affects all companies in the stock market (Nondiversifiable risk)

firm-specific risk

risk that affects only a single company (Diversifiable risk)

15. Which of the following makes this a true statement: The shape of the efficient frontier implies that A. diminishing returns apply to risk-taking in the investment world. B. increasing returns apply to risk-taking in the investment world. C. returns are not impacted by risk-taking in the investment world. D. None of these complete the sentence to make it true.

A

19. We commonly measure the risk-return relationship using which of the following? A. coefficient of variation B. correlation coefficient C. standard deviation D. expected returns

A

3. This is a measure summarizing the overall past performance of an investment. A. average return B. dollar return C. market return D. percentage return

A

6. This is a measure of risk to reward earned by an investment over a specific period of time. A. coefficient of variation B. market deviation C. standard deviation D. total variation

A

9. This is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification. A. firm specific risk B. market risk C. modern portfolio risk D. total risk

A

Dollar Return

the amount of profit or loss from an investment denoted in dollars

optimal portfolio

the best portfolio of securities for the investor's level of risk aversion

Efficient Frontier

the combination of all efficient portfolios

financial leverage

the extent to which debt securities are used by a firm

markets makers

the financial service companies that connect investors and borrowers, either directly (investment banks) or indirectly (commercial banks) Oversee ordinary trading process

4. Which of these statements is true? A. When people purchase a stock, they know exactly what their dollar and percent return are going to be. B. Many people purchase stocks as they find comfort in the certainty for this safe form of investing. C. When people purchase a stock, they know the short-term return, but not the long term return. D. When people purchase a stock, they do not know what their return is going to be - either short term or in the long run.

D

5. This is defined as the volatility of an investment, which includes firm specific risk as well as market risk. A. diversifiable risk B. market risk C. standard deviation D. total risk

D

Dealers

NASDAQ market makers who use their own capital to trade with investors

Residual Claimants

Ownership of cash flows and value after other claimants are paid

S&P 500 Index

an index containing the stocks of 500 Large-Cap corporations, most of them being US corps.

limit order

an order to a broker to buy a specific stock only if its price is below a certain level, or to sell a specific stock only if its price is above a certain level

8. This is defined as a combination of investment assets held by an investor. A. bundle B. market basket C. portfolio D. All of these

C

Constant growth model

a valuation method based on constantly growing dividends

variable growth rate

a valuation technique used when a firm's current growth rate is expected to change some time in the future

14. This is the term for portfolios with the highest return possible for each risk level. A. efficient portfolios B. modern portfolios C. optimal portfolios D. total portfolios

A

13. This is the investor's combination of securities that achieves the highest expected return for a given risk level. A. efficient portfolio B. modern portfolio C. optimal portfolio D. total portfolio

C

7. This index tracks 500 companies which allows for a great deal of diversification. A. Nasdaq B. Fortune 500 C. S&P 500 D. Wall Street Journal

C

portfolio

A collection of financial assets

Market Capitalization

A firm performance metric that captures the total dollar market value of a company's total outstanding shares at any given point in time.Current stock price multiplied by the number of shares outstanding

preferred stock

A hybrid security that has characteristics of both long term debt and common stock

Capitol market line

A line on a graph of return and risk that from the risk free rate through the market portfolio

coefficient of variation

A measure of relative variability computed by dividing the standard deviation by the mean and multiplying by 100.

Correlation

A measure of the relationship between two variables ranging between -1 and 1

efficent market hypothesis

A theory that describes what type of information are reflected in current stock prices

Capitol Asset Pricing Model

An asset pricing theory based on Beta, a measure of market risk

NASDAQ Composite

An index based on the stock prices of over 5,000 companies traded on the NASDAQ Stock Market. The NASDAQ market takes its name from the National Association of Securities Dealers Automated Quotation System.

Common Stock

An ownership stake in a corporation

1. This includes any capital gain (or loss) that occurred as well as any income that you received from a specific investment. A. average return B. dollar return C. market return D. portfolio

B

10. This is the portion of total risk that is attributable to overall economic factors. A. firm specific risk B. market risk C. modern portfolio risk D. total risk

B

12. This is the concept and procedure for combining securities into a portfolio to minimize risk. A. firm specific theory B. modern portfolio theory C. optimal portfolio theory D. total portfolio theory

B

16. This is a measurement of the co-movement between two variables that ranges between -1 and +1. A. coefficient of variation B. correlation C. standard deviation D. total risk

B

17. To find the percentage return of an investment, A. multiply the dollar return by the investment's value at the beginning of the period. B. divide the dollar return by the investment's value at the beginning of the period. C. multiply the dollar return by the investment's value at the end of the period. D. divide the dollar return by the investment's value at the end of the period.

B

18. Which statement is true? A. The larger the standard deviation, the lower the total risk. B. The larger the standard deviation, the higher the total risk. C. The larger the standard deviation, the more portfolio risk. D. The standard deviation is not an indication of total risk.

B

11. This is another term for market risk. A. firm specific risk B. modern portfolio risk C. nondiversifiable risk D. total risk

C

Portfolos beta

Combination of betas based on percents

Price/Earnings (P/E) Ratio

Current stock price divided by annual earnings per share (EPS).

2. This is the dollar return characterized as a percentage of money invested. A. average return B. dollar return C. market return D. percentage return

D

Brokers

Floor traders who execute trades for them and others

Diversification

Spreading out investments to reduce risk

Growth Stocks

Stocks expected to have above average growth in a specific area

Penny Stocks

Stocks on small companies that are priced below 1$

New York Stock Exchange (NYSE)

The largest of these markets is the New York Stock Exchange,Also known as the "Big Board" with a trading floor

Beta

The measure of the risk level of stock or portfolio to market risk. (Low beta = low market risk)

market risk premium

The return on the market portfolio minus the risk free rate

Ticker symbol

Unique code created for companies, 1 - 5 letters

Modern Portfolio Theory

a concept and procedure for combining securities into a portfolio to minimize risk

Dow Jones Industrial Average

a measure based on the prices of the stocks of 30 large industry leading companies, widely used as a barometer of the stock market's health

standard deviation

a measure of past return, volatility, or risk of an investment, Large SD = high risk

Average Returns

a measure summarizing the past performance of an investment

efficient portfolio

a portfolio that maximizes return for a given level of risk

efficient market

a securities market in which prices fully reflect available information on each security

stock index

a statistic that tracks how the prices of a specific set of stocks have changed and performance

Market order

a stock buy or sell order to be immediately executed at the current market price

Relative Value

a stock's priceyness measured relative to other stocks

Dividend Discount Model

a valuation approach based on future dividend income

Percentages return

the percent return on the profit or loss calculated with the total form the original

Asset Pricing

the process of directly specifying the relationship between required return and risk

ask

the quoted price investors are likely to pay when they buy stock

Bid

the quoted price investors are likely to receive when they sell stock

expected return

the return expected over the next period on one asset relative to alternative assets

Security Market Line

the return line that reflects the attitudes of investors regarding the minimum acceptable return for a given level of systematic risk associated with a security

trading posts

trading location on the floor