Finance Chapter 10

How might a small market risk premium impact people's desire to buy stocks? A. Investors with high risk aversion will be less willing to invest in stocks. B. Investors with high risk aversion will be more willing to invest in stocks. C. It will only impact the share prices. D. None of these statements is correct.

A

Special rights given to some employees to buy a specific number of shares of the company stock at a fixed price during a specific period of time. A. executive stock options B. privately held information C. restricted stock D. stock market bubble

A

Which of the following statements is correct? A. If the market is strong-form efficient it must also be weak-form efficient and semi-strong efficient. B. There is evidence to suggest that the market is strong-form efficient because corporate insiders have made extraordinary profits by trading on inside information. C. The Efficient Market Hypothesis states that security prices will be based on their expected return. D. None of these statements is correct.

A

A measure of the sensitivity of a stock or portfolio to market risk. A. behavioral finance B. beta C. efficient market D. hedge

B

How might a large market risk premium impact people's desire to buy stocks? A. Investors with high risk aversion will be less willing to invest in stocks. B. Investors with high risk aversion will be more willing to invest in stocks. C. It will only impact the share prices. D. None of these statements is correct.

B

In theory, this is a combination of securities that places the portfolio on the efficient frontier and on a line tangent from the risk-free rate. A. efficient market B. market portfolio C. probability distribution D. stock market bubble

B

The study of the cognitive processes and biases associated with making financial and economic decisions. A. asset pricing model B. behavioral finance C. efficient market hypothesis D. stock market bubble

B

Shares of stock issued to employees that have limitations on when they can be sold. A. executive stock options B. privately held information C. restricted stock D. stock market bubble

C

Similar to the Capital Market Line except risk is characterized by beta instead of standard deviation. A. Market Risk Line B. Probability Market Line C. Security Market Line D. Stock Market Line

C

All of the following are necessary conditions for an efficient market except _________. A. Low trading or transaction costs B. Many buyers and sellers C. Free and readily available information to market participants D. Low stock prices

D

Consider an asset that provides the same return no matter what economic state occurs. What would be the standard deviation of this asset? A. Unable to answer since there is no data to calculate the standard deviation. B. A very low number since it would have very low risk. C. 1 D. 0

D

Investor enthusiasm causes an inflated bull market that drives prices too high, ending in a dramatic collapse in prices. A. behavior finance B. efficient market C. privately held information D. stock market bubble

D

The study of the cognitive processes and biases associated with making financial and economic decisions is known as _______________. A. Efficient Thinking Hypothesis B. Financial Cognition C. Financial Leverage D. Behavioral Finance

D

This is the reward for taking systematic stock market risk. A. required return B. risk-free rate C. risk premium D. market risk premium

D

Which of the following is correct? A. Hedge funds often sell stock they don't even own. B. Hedge funds maintain secrecy about their holdings, trading and strategies. C. Hedge funds are limited to sophisticated investors. D. All of these statements are correct.

D

Which of the following statements is incorrect regarding how beta is calculated? A. The company return is the independent variable. B. The market portfolio return is the dependent variable. C. Using the oldest data possible will yield the most accurate results. D. All of these statements are incorrect.

D

Stock A has a required return of 19%. Stock B has a required return of 11%. Assume a risk-free rate of 4.75%. Which of the following is a correct statement about the two stocks? A. Stock A is riskier. B. Stock B is riskier. C. The stocks have the same risk. D. We would need to know if the markets are efficient to answer this question.

A

This model includes an equation that relates a stock's required return to an appropriate risk premium: A. asset pricing B. behavioral finance C. beta D. efficient markets

A

US Bancorp holds a press conference to announce a positive news event that was unexpected to the market. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price falls resulting in a net increase of only $4. Given this information which of the following statements is correct? A. This is an example of a market overreaction. B. This is an example of a market underreaction. C. This is an example of a semi-strong efficient market. D. None of these statements are correct.

A

Which of the following is incorrect? A. Most firms would want to sell additional shares of common stock if they feel their stock is undervalued. B. Most firms would not want to repurchase shares of common stock if they feel their stock is overvalued. C. It is important for financial managers to understand market efficiency because it helps them understand how their stock prices will react to different types of decisions and news announcements. D. None of these statements are incorrect.

A

Which of the following statements is correct? A. Penny stocks are the stocks of small companies that are priced below $1 per share. B. Restricted stocks are shares of stock issued to executives that have limitations on voting rights. C. The Capital Market Line graphs the relationship between return and risk (beta). D. All of these statements are correct.

A

Which of the following statements is incorrect? A. The capital market line shows the relationship between return and risk as measured by the standard deviation. B. The Efficient Market Hypothesis states that security prices fully reflect all available information. C. The security market line shows the relationship between return and risk as measured by beta. D. None of these statements are correct.

A

IBM has a beta of 1.0 and Apple Computer has a beta of 3.0. Which of the following statements must be correct? A. The market risk premium for Apple must be larger than the market risk premium of IBM. B. If investors become more risk averse, the expected return of Apple will increase more than the expected return on IBM. C. Apple's expected rate of return must be three times as large as IBM's. D. None of these statements is correct.

B

Stock A has a required return of 12%. Stock B has a required return of 15%. Assume a risk-free rate of 4.75%. Which of the following is a correct statement about the two stocks? A. Stock A is riskier. B. Stock B is riskier. C. The stocks have the same risk. D. We would need to know if the markets are efficient to answer this question.

B

The asset pricing theory based on a beta, a measure of market risk. A. Behavioral Asset Pricing Model B. Capital Asset Pricing Model C. Efficient Markets Asset Pricing Model D. Efficient Market Hypothesis

B

The constant growth model assumes which of the following? A. That there is privately held information. B. That the stock is efficiently priced. C. That there are executive stock options available to managers. D. That there is no restricted stock.

B

The set of probabilities for all possible occurrences. A. probability B. probability distribution C. stock market bubble D. market probabilities

B

The use of debt to increase an investment position. A. behavioral finance B. financial leverage C. probability D. stock market bubble

B

This is the average of the possible returns weighted by the likelihood of those returns occurring. A. efficient return B. expected return C. market return D. required return

B

This is typically considered the return on U.S. government bonds and bills and equals the real interest plus the expected inflation premium. A. required return B. risk-free rate C. risk premium D. market risk premium

B

US Bancorp holds a press conference to announce a positive news event that was unexpected to the market. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price continues to increase resulting in a total increase of $11. Given this information which of the following statements is correct? A. This is an example of a market overreaction. B. This is an example of a market underreaction. C. This is an example of a semi-strong efficient market. D. None of these statements are correct.

B

Which of the following is a true statement? A. The risk and return that a firm experienced in the past is also the risk level for its future. B. Firms can quite possibly change their stocks' risk level by substantially changing their business. C. If a firm takes on riskier new projects over time, the firm itself will become less risky. D. If a firm takes on less risky new projects over time, the firm itself will become more risky.

B

Which of these is the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio? A. Capital Asset Pricing Line B. Capital Market Line C. Efficient Market Line D. Efficient Market Hypothesis

B

A theory that describes the types of information that are reflected in current stock prices. A. asset pricing B. behavioral finance C. efficient market hypothesis D. public information

C

The stocks of small companies that are priced below $1 per share. A. bargain stocks B. hedge fund stocks C. penny stocks D. stock market bubble stocks

C

This has not been released to the public, but is known by few individuals, likely company insiders. A. audited financial statements B. restricted stock C. privately held information D. insider trading

C

This is the reward investors require for taking risk. A. required return B. risk-free rate C. risk premium D. market risk premium

C

Whenever a set of stock prices go unnaturally high and subsequently crash down, the market experiences what we call a(n) ___________________. A. Financial meltdown B. Irrational behavior C. Stock market bubble D. None of these

C

Which of the following is most correct? A. In an efficient market, investors will buy overvalued stock which will drive its price down. B. In an efficient market, investors will sell undervalued stock which will drive its price down. C. In an efficient market, investors will sell overvalued stock which will drive its price down. D. None of these statements is correct.

C

Which of the following statements is incorrect? A. The Security Market Line shows the relationship between risk and return for any stock or portfolio. B. The y-intercept of the Security Market Line represents the return on the risk-free asset. C. The measure of risk used in creating the Security Market Line is the standard deviation. D. None of these statements are incorrect.

C

You obtain beta estimates of General Electric from two different online sources and you are surprised to find that they are so different. Which of the following would not be a correct explanation for the difference? A. One source used weekly data and another used monthly data. B. One source used the S&P500 for a market proxy and the other used the Dow Jones Industrial Average. C. One used regression analysis and the other used geometric analysis. D. All of these are correct explanations for the difference.

C

This is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc. A. audited financial statements B. generally accepted accounting principles C. privately held information D. public information

D

Which of the following is NOT a necessary condition for an efficient market? A. Many buyers and sellers. B. No prohibitively high barriers to entry. C. Free and readily available information available to all participants. D. No trading or transaction costs.

D

Which of the following is a concern regarding beta? A. Using different market proxies will result in different estimates of beta. B. A company can alter its risk level which may make the beta estimate obsolete. C. Research indicates that a company's beta does not appear to predict its future return very well. D. All of these statements are valid concerns regarding beta.

D

Which of the following is incorrect? A. Technical analysis is expected to work if markets are weak-form efficient. B. If markets are strong-form efficient then they must also be weak-form efficient. C. It is not likely that the market is strong-form efficient. D. None of these statements are incorrect.

D

Which of these is the measurement of risk for a collection of stocks for an investor? A. beta B. efficient market C. expected return D. portfolio beta

D