Financial Institutions HW 4
The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's beta. a. margin b. Treynor c. arbitrage d. Sharpe
treynor
A firm's stock price is affected not only by macroeconomic and market conditions but also by firm specific conditions. True False
true
A market order is an order to buy or sell a stock at the best possible price. True False
true
A relatively simple method of valuing a stock is to apply the mean price-earnings (PE) ratio of all publicly traded competitors in the respective industry to the firm's expected earnings for the year. True False
true
A stop-loss order is a particular type of limit order whereby the investor specifies a selling price that is below the current market price of the stock. True False
true
A weak dollar may enhance the value of a U.S. firm whose sales are dependent on the U.S. economy. True False
true
For firms that do not pay dividends, a more suitable valuation may be the free cash flow model. True False
true
Regarding the value-at-risk method, the same methods used to derive the maximum expected loss of one stock can be applied to derive the maximum expected loss of a stock portfolio for a given confidence level. True False
true
Specialists and market-makers both enhance the stock market's liquidity by making a market for stocks. True False
true
Stock price volatility increased during the credit crisis. True False
true
The "trade-though rule" established by the SEC requires that an order for NYSE-listed stocks must be executed on the exchange that offers the best price for the investor. True False
true
If security markets are semi-strong form efficient, investors cannot solely use ____ to earn excess returns. a. previous price movements b. insider information c. publicly available information d. A and C
a and c
A relatively high percentage (such as 3 percent) of the ratio of the number of shares sold short divided by the total number of shares outstanding suggests a large amount of short positions in the market, which implies that a relatively large number of investors expect the stock's price to decline. True False
true
The bid-ask spread is negatively related to a. inventory costs. b. order costs. c. trading volume. d. risk
trading volume
The ____ is commonly used as a proxy for the risk-free rate in the Capital Asset Pricing Model. a. federal funds rate b. discount rate c. prime rate d. Treasury bond rate
treasury bond rate
A stock has a standard deviation of daily returns of 3 percent. It wants to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from the expected outcome. The stock's expected daily return is .1 percent. The lower boundary is a. -3.00 percent. b. -1.65 percent. c. -4.85 percent. d. -5.05 percent.
-4.85%
Boris stock has an average return of 15 percent. Its beta is 1.5. Its standard deviation of returns is 25 percent. The average risk-free rate is 6 percent. The Sharpe index for Boris stock is a. 0.35. b. 0.36. c. 0.45. d. 0.28. e. none of the above
.36
Morgan stock has an average return of 15 percent, a beta of 2.5, and a standard deviation of returns of 20 percent. The Treynor index of Morgan stock is a. 0.04. b. 0.05. c. 0.35. d. 0.03. e. none of the above
0.05
Assume a stock is initially priced at $50, and pays an annual $2 dividend. An investor uses cash to pay $25 a share and borrows the remaining funds at a 12 percent annual interest. What is the return if the investor sells the stock for $55 at the end of one year? a. 10 percent b. 30 percent c. 8 percent d. 50 percent e. 16 percent
16 percent
Sorvino Co. is expected to offer a dividend of $3.2 per share per year forever. The required rate of return on Sorvino stock is 13 percent. Thus, the price of a share of Sorvino stock, according to the dividend discount model, is $____. a. 4.06 b. 4.16 c. 40.63 d. 24.62 e. none of the above
24.62
Protsky Inc. just paid a dividend of $2.20 per share. The dividend growth rate for Protsky's dividends is 3 percent per year. If the required rate of return on Protsky stock is 12 percent, the stock should be valued at $____ per share according to the dividend discount model. a. 24.44 b. 25.18 c. 75.53 d. 18.88
25.18
A firm is expected to generate earnings of $2.22 per share next year. The mean ratio of share price to expected earnings of competitors in the same industry is 15. Based on this information, the valuation of the firm's shares based on the price-earnings (PE) method is a. $2.22. b. $6.76. c. $33.30. d. none of the above
33.30
Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor purchases the stock, using only personal funds and not borrowing from the brokerage firm. If, after one year, the stock is sold at a price of $65.25 per share, the return on the stock is a. 28.5 percent. b. 26.5 percent. c. 30.5 percent. d. 34.5 percent.
34.5 percent
Kudrow stock just paid a dividend of $4.76 per share and plans to pay a dividend of $5 per share next year, which is expected to increase by 3 percent per year subsequently. The required rate of return is 15 percent. The value of Kudrow stock, according to the dividend discount model, is $____. a. 39.67 b. 41.67 c. 33.33 d. 31.73 e. none of the above
41.67
Mark would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in the coming year. He can either put up the entire amount and purchase the stock, or borrow $35 from his brokerage firm at an annual interest rate of 12 percent and put up the remainder. Mark thinks he can sell the stock for $100 after one year. If Mark does not borrow any money from his brokerage firm, what is the estimated return on the stock?
42.86
Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor purchases the stock on margin, paying $25 per share and borrowing the remainder from the brokerage firm at 9 percent annual interest. If, after one year, the stock is sold at a price of $65.25 per share, the return on the stock is a. 69 percent. b. 60 percent. c. 44 percent. d. 30 percent.
60 percent
Karen just purchased a stock costing $33 on margin, paying $23 and borrowing the remainder from a brokerage firm at 15 percent annual interest. The stock pays an annual dividend of $2. If Karen sells the stock after one year at a price of $50, what is the return on the stock? a. 27.60 percent b. 82.61 percent c. 76.09 percent d. 58.70 percent e. none of the above
76.09 percent
The SEC's Division of Market Regulation assesses possible violations of the SEC's regulations and can take action against individuals or firms. True False
False
When new information suggests that a firm will experience lower cash flows than previously anticipated or lower risk, investors will revalue the corresponding stock downward. True False
False
____ offer advice to customers on stocks to buy or sell. a. Specialists b. Floor brokers c. Market-makers d. Full-service brokers e. Discount brokers
Full-service brokers
The expected acquisition of a firm typically results in ____ in the target's stock price. a. an increase b. a decrease c. no change d. none of the above
an inrease
The common price-earnings valuation method applied the ____ price-earnings ratio to ____ earnings per share in order to value the firm's stock. a. average industry; industry b. firm's; industry c. average industry; firm's d. firm's; firm's
average industry; firms
When evaluating stock performance, ____ measures variability that is systematically related to market returns; ____ measures total variability of a stock's returns. a. standard deviation; beta b. beta; error term c. intercept; beta d. beta; standard deviation
beta; standard deviation
The arbitrage pricing theory (APT) differs from the capital asset pricing model (CAPM) in that it suggests that stock prices a. cannot be influenced at all by the industry factors. b. are not influenced at all by the market. c. are influenced only by the market itself. d. can be influenced by a set of factors in addition to the market.
can be influenced by a set of factors in addition to the market
The ____ is commonly used to determine what a stock's price should have been. a. Capital Asset Pricing Model b. Treynor Index c. Sharpe Index d. B and C
capital asset pricing model
The ____ is not a factor used in the capital asset pricing model (CAPM) to derive the return of an asset. a. prevailing risk-free rate b. dividend growth rate c. market return d. covariance between the asset's returns and market returns e. All of the above are factors used in the CAPM.
dividend growth rate
A trading halt prevents a stock from experiencing a loss in response to news. True False
false
Arbitrage pricing theory (APT) suggests that a stock's price is influenced only by a stock's beta. True False
false
If investors agree on a firm's forecasted earnings, they will derive the same value for that firm using the PE method to value the firm's stock. True False
false
Regulation Fair Disclosure (FD) requires firms to disclose relevant information first to their most important clients. True False
false
Stock repurchases are commonly viewed as an unfavorable signal about the firm. True False
false
Stocks that have relatively little trading are normally subject to less price volatility. True False
false
The capital asset pricing model (CAPM) is based on the premise that the only important risk of a firm is unsystematic risk. True False
false
The initial margin is the minimum amount of margin that investors must maintain as a percentage of the stock's value without receiving a margin call. True False
false
The main source of uncertainty in computing the return of a stock is the dividend to be received next year. True False
false
Stock prices of U.S. firms primarily involved in exporting are likely to be ____ affected by a weak dollar and ____ affected by a strong dollar. a. adversely; favorably b. favorably; favorably c. favorably; adversely d. adversely; adversely
favorably; adversely
____ facilitate transactions on the New York Stock Exchange by executing stock transactions for their clients. a. Floor brokers b. Capstone members c. Specialists d. None of the above
floor brokers
Which of the following statements is incorrect? a. For each stock that is traded in the Nasdaq market, there are 50 market-makers on average. b. Market-makers take positions to capitalize on the discrepancy between the prevailing stock price and their own valuation of a stock. c. Specialists and market-makers may take the opposite position of uninformed investors and therefore stand to benefit if their expectations are correct. d. The spread quoted for a given stock may vary among market-makers.
for each stock that is traded in the nasdaq market, there are 50 market-makers on average
Program trading a. is commonly used to reduce the susceptibility of a stock portfolio to stock market movements. b. may involve the purchase of stocks that become "underpriced." c. may involve the sale of stocks that become "overpriced." d. can be combined with the trading of individual bonds to create portfolio insurance. e. none of the above
is commonly used to reduce the susceptibility of a stock portfolio to stock market movements
Which of the following is incorrect regarding the capital asset pricing model (CAPM)? a. It is sometimes used to estimate the required rate of return for any firm with publicly traded stock. b. It is based on the premise that the only important risk of a firm is systematic risk. c. It is concerned with unsystematic risk. d. All of the above are true.
it is concerned with unsystematic risk
Which of the following statements is incorrect with respect to Regulation Fair Disclosure (FD)? a. It required firms to disclose relevant information broadly to investors at the same time. b. It restricts firms from providing analysts with information that they could use before the market is aware of the information. c. It requires firms to announce a change in expected earnings to all investors and other interested parties at the same time. d. It prohibits firms from communicating with analysts after a news announcement is made to all investors. e. All of the above are correct with respect to Regulation FD.
it prohibits from communicating with analysts after a news announcement is made to all investors
Value at risk estimates the ____ a particular investment for a specified confidence level. a. standard deviation of b. beta of c. largest expected loss to d. risk-free rate of
largest expected loss to
Stock X has a lower beta than Stock Y. The market return for next month is expected to be either -1 percent, +1 percent, or +2 percent with an equal probability of each scenario. The probability distribution of Stock X returns for next month is a. the same as that of Stock Y. b. less dispersed than that of Stock Y. c. more dispersed than that of Stock Y. d. zero.
less dispersed than that of stock Y
A short seller a. anticipates that the price of the stock sold short will increase. b. earns the difference between what they initially paid for the stock versus what they later sell the stock for. c. makes a profit equal to the difference between the original sell price and the price paid for the stock, after subtracting any dividend payments made. d. is essentially lending the stock to another investor and will ultimately receive that stock back from that investor. e. none of the above
makes a profit equal to the difference between the original sell price and the price paid for the stock, after subtracting any dividend payments made
A(n) ____ from a broker requires the investor to put up additional collateral. a. maintenance margin b. initial margin c. margin call d. none of the above
margin call
____ are enforced to restrict the amount of credit extended to customers by stockbrokers. a. Margin requirements b. Maintenance margins c. Initial margins d. Limit orders
margin requirements
A ____ order to buy or sell a stock means to execute the transaction at the best possible price. a. limit b. stop-loss c. stop-buy d. market
market
The risk of a short sale is that the stock price a. may decrease over time. b. will remain the same. c. may increase over time. d. none of the above
may increase over time
You purchase a stock with cash, and you earn a negative return on the stock. If you had purchased the stock with 60 percent cash and 40 percent borrowed funds, your return on your investment would have been a. zero. b. positive. c. negative, but more favorable than if you had covered the entire investment with cash. d. more negative than if you had covered the entire investment with cash.
more negative than if you had covered the entire investment with cash
Technical analysis relies on the use of ____ to make investment decisions. a. recent stock price trends b. industry conditions c. interest rates d. inflationary expectations
recent stock price trends
The limitations of the dividend discount model are most pronounced for a firm that a. has a high beta. b. has high expected future earnings. c. distributes most of its earnings as dividends. d. retains all of its earnings. e. none of the above
retains all of its earnings
The formula for a stock portfolio's volatility does not contain the a. variance (standard deviation squared) of returns of each stock. b. risk-free rate. c. correlation coefficients between returns of each stock. d. weight (proportional investment) assigned to each stock.
risk-free rate
A stock's beta can be measured from the estimate of the using regression analysis. a. risk-free rate b. intercept c. slope coefficient d. market return
slope coefficient
____ facilitate transactions on the New York Stock Exchange by taking positions in specific stocks; they also stand ready to buy or sell these stocks. a. Floor brokers b. Capstone members c. Specialists d. None of the above
specialists
Trading halts are imposed by a. stock exchanges. b. the SEC. c. brokers. d. the Treasury.
stock exchanges
The ____ is not a measure of a stock's risk. a. stock's price volatility b. stock's return c. stock's beta d. value-at-risk method e. All of the above are measures of a stock's risk.
stocks return
An investor sold a stock short a year ago for $50 per share. The stock's price is currently $52 per share. If the investor is unwilling to accept a loss on the short sale of more than $5 per share on the transaction, she could place a a. stop-buy order with a specified purchase price of $45 per share. b. stop-loss order with a specified selling price of $55 per share. c. stop-loss order with a specified selling price of $45 per share. d. stop-buy order with a specified purchase price of $55 per share.
stop-buy order with a specified purchase price of $55 per share
The demand by foreign investors for the stock of a U.S. firm sold on a U.S. exchange may be higher when the dollar is expected to ____, other things being equal. (Assume the firm's operations are unaffected by the value of the dollar.) a. strengthen b. weaken c. stabilize d. B and C
strengthen
Which of the following is not commonly used as the estimate of a stock's volatility? a. the implied volatility derived from an option pricing model b. the trend of historical standard deviations of returns over recent periods c. the estimate of its option premium derived from an option pricing model d. the estimate of its standard deviation of returns over a recent period
the estimate of its option premium derived from an option pricing model
The PE method to stock valuation may result in an inaccurate valuation for a firm if errors are made in forecasting the firm's future earnings or in choosing the industry composite used to derive the PE ratio. True False
true
The Treynor index is similar to the Sharpe index, except that is uses beta rather than standard deviation to measure the stock's risk. True False
true
While the previous year's earnings are often used as a base for forecasting future earnings, the recent year's earnings do not always provide an accurate forecast of the future. True False
true
The January effect refers to the ____ pressure on ____ stocks in January of every year. a. upward; large b. downward; small c. upward; small d. downward; large
upward; small
If security prices fully reflect all market-related information (such as historical price patterns) but do not fully reflect all other public information, security markets are a. weak-form efficient. b. semi-strong form efficient. c. strong form efficient. d. B and C e. none of the above
weak-form efficient