Investing
The capital gains yield is equal to:
(Pt + 1 - Pt)/Pt.
A stock with which one of the following betas has an expected return that most resembles the overall market expected rate of return?
.99
What is the beta of a risk-free security?
0
Which one of the following values would be the most preferable as a Sharpe ratio?
1.02
Which one of the following statements is correct? Trading on private information that you just happen to overhear is legal. Only tippers can be accused of illegal insider trading. Company insiders are not permitted to trade their employer's securities. Any trading based on information known to be private is illegal. Tippees are permitted to trade securities based on information they know is private.
Any trading based on information known to be private is illegal.
You have been given the following return information for a mutual fund, the market index, and the risk-free rate. You also know that the return correlation between the fund and the market is .97. What are the Sharpe and Treynor ratios for the fund?
Average return of the fund = .0417 Average risk-free rate = .0360 Standard deviation of the fund's returns = .1822 Fund's beta versus the market = .68 Sharpe = (.0417 − .0360) / .1822 = .0314 Treynor = (.0417 − .0360) / .68 = .0084
Fill in the missing information in the following table. Assume that Portfolio AB is 60% invested in Stock A. Annual Returns on Stocks A and B: Year Stock A Stock B StockAB 2015 16% 24% -- 2016 35% -35% -- 2017 -17% 45% -- 2018 25% 17% -- 2019 15% 27% -- Average return -- -- Standard deviation -- --
Average return(A) = ( .160 + .350 - .170 + .250 + .150)/5 = 14.80% Std. Dev. (A) = ((( .160 - .1480)^2 + ( .350 - .1480)^2) + ( -.170 - .1480)^2 + ( .250 - .1480)^2 + ( .150 - .1480)^2)/(5 - 1))^.5 = 19.52% Average return(B) = ( .240 - .350 + .450 + .170 + .270)/5 = 15.60% Std. Dev. (B) = ((( .240 - .1560)^2 + ( -.350 - .1560)^2 + ( .450 - .1560)^2 + ( .170 - .1560)^2 + ( .270 - .1560)^2)/(5 - 1)))^.5 = 30.11% Average return(AB)2015 = .60( .160) + .40( .240) = 19.20% Average return(AB)2016 = .60( .350) + .40( -.350) = 7.00% Average return(AB)2017 = .60( -.170) + .40( .450) = 7.80% Average return(AB)2018 = .60( .250) + .40( .170) = 21.80% Average return(AB)2019 = .60( .150) + .40( .270) = 19.80% Average(AB) = ( .1920 + .0700 + .0780 + .2180 + .1980)/5 = 15.12% Std. Dev.(AB) = ((( .1920 - .1512)^2 + ( .0700 - .1512)^2 + ( .0780 - .1512)^2 + ( .2180 - .1512)^2 + ( .1980 - .1512)^2)/(5 - 1))^.5 = 7.12%
Which one of the following measures systematic risk?
Beta
You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.16 and the total portfolio is equally as risky as the market. What is the beta of the second stock?
Bp = 1.0 = 1/3(0) + 1/3(1.16) + 1/3(Bx) Bx = 1.84
Which one of the following is the theory that states that the value of a security is dependent upon the pure time value of money, the reward for bearing systematic risk, and the amount of systematic risk?
CAPM
A particular stock has a dividend yield of 1.2%. Last year, the stock price fell from $79 to $65. What was the return for the year?
Capital gains yield = ($65 - 79) / $79 = -17.72% Total return = capital gains yield + dividend yield Total return = -17.72% + 1.2% Total return = -16.52%
A particular stock has a dividend yield of 1.5%. Last year, the stock price fell from $82 to $68. What was the return for the year?
Capital gains yield: ($68 - 82) / $82 = 17.07% Total return = capital gains yield + dividend yield Total return = -17.07% + 1.5% Total return = -15.57%
The rates of return on Cherry Jalopies, Inc., stock over the last five years were 18%, 11%, -9%, 7%, and 10%. Over the same period, the returns on Straw Construction Company's stock were 16%, 15%, -8%, 3%, and 15%. What was the arithmetic average return on each stock over this period?
Cherry average return =(18% + 11% - 9% + 7% + 10%) / 5 =7.4% Straw average return =(16% + 15% - 8% + 3% + 15%) / 5 =8.2%
Which one of the following statements must be true? Various economic states affect a portfolio's expected return but not the expected level of risk. Considering the possible states of the economy emphasizes the fact that multiple outcomes can be realized from an investment. The total of the probabilities of the economic states can vary between zero and 100%. All securities are projected to have higher rates of return when the economy booms versus when it is normal. The highest probability of occurrence must be placed on a normal economy versus either a boom or a recession.
Considering the possible states of the economy emphasizes the fact that multiple outcomes can be realized from an investment.
The following are the daily returns for both the overall market and for Omega, Inc. What is the cumulative abnormal return on Omega, Inc., stock for these five days? Date R(m) Omega 24-Nov 1.20% 1.20% 25-Nov −.40% .10% 26-Nov −.10% 1.00% 27-Nov .40% −.50% 28-Nov .50% −.70%
Date R(m) Omega Abn. 24-Nov 1.20% 1.20%.00% 25-Nov −.40% .10% .50% 26-Nov −.10% 1.00%1.10% 27-Nov .40%−.50%−.90% 28-Nov .50%−.70%−1.20% Cumulative Abnormal Return =−.50%
Based on the dividend discount model, an increase in which of the following will lower the current value of a stock? I. amount of the next dividend II. dividend growth rate III. discount rate
Discount rate
The Sharpe ratio is best used to evaluate which one of the following?
Diversified Portfolios
Asset W has an expected return of 17.3 percent and a beta of 1.85. If the risk-free rate is 5.0 percent, what is the market risk premium?
E(RW) = .173 = .050 + MRP(1.85) MRP = .123 / 1.85 = .0665, or 6.65%
A share of stock sells for $38 today. The beta of the stock is 1.0 and the expected return on the market is 17 percent. The stock is expected to pay a dividend of $1.10 in one year. If the risk-free rate is 3.7 percent, what should the share price be in one year?
E(Ri) = .037 + (.17 − .037)(1.0) = .1700 Dividend yield = $1.10 / $38 = .0289 Capital gains yield = .1700 − .0289 = .1411 Price next year = $38(1 + .1411) = $43.36
A stock has a beta of 1.10, the expected return on the market is 12 percent, and the risk-free rate is 4.30 percent. What must the expected return on this stock be?
E(Ri) = .043 + (.12 − .043)(1.10) = .1277, or 12.77%
A stock has an expected return of 12.9 percent and a beta of 1.40, and the expected return on the market is 10.60 percent. What must the risk-free rate be?
E(Ri) = .129 = Rf + (.106 − Rf)(1.40) Rf = .0485, or 4.85%
A stock has an expected return of 13.1%. The beta of the stock is 1.70 and the risk-free rate is 2.6%. What must the expected return on the market be?
E(Ri) = .131 = .026 + (E(Rm) - .026)(1.70) E(Rm) = 8.78%
A stock has an expected return of 13.8 percent, the risk-free rate is 3.4 percent, and the market risk premium is 9.1 percent. What must the beta of this stock be?
E(Ri) = .138 = .034 + .091βi βi = 1.14
Use the following information to calculate the expected return and standard deviation of a portfolio that is 70 percent invested in 3 Doors, Inc., and 30 percent invested in Down Co.: 3 Doors, Inc. Down Co. Exp. return, E(R) 12% 12% Standard dev., σ 42 44 Correlation .27
E(Rp) = .70(.12) + .30(.12) = 12.00% σp^2 = .70^2(.42^2) + .30^2(.44^2) + 2(.70)(.30)(.42)(.44)(.27) = .12482 σp = .12482^.5 = 35.33%
Which one of the following holds that investors cannot consistently earn positive abnormal returns?
Efficient Market Hypothesis
Which one of the following will automatically occur if all investors are rational?
Equivalent risk assets will have equal expected rates of return.
Which one of the following is a research method used to study the effects news has on stock prices?
Event Study
Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 5.2%, the expected return on the market is 12.2%, and the betas of the two stocks are 1.4 and .9, respectively. Landon's own forecast of the returns on the two stocks are 16.40% for Furhman Labs and 11.20% for Garten. a. Calculate the required return for each stock. b. Is each stock undervalued, fairly valued, or overvalued?
Furhman Labs: E(R) = 5.2% + 1.4(12.2% - 5.2%) = 15.00% Garten: E(R) = 5.2% + .9(12.2% - 5.2%) = 11.50% Furhman: Forecast - Required = 16.40% - 15.00% = 1.40% Undervalued Garten: Forecast - Required = 11.20% - 11.50% = -.30% Overvalued
Your grandfather invested $1,000 in a stock 30 years ago. Currently, the value of his account is $317,000. What is his geometric return over this period?
Geometric return =($317,000 / $1,000)^1/30 - 1 =21.16%
The rates of return on Cherry Jalopies, Inc, stock over the last five years were 23%, 11%, -5%, 7%, and 10%. What is the geometric return for Cherry Jalopies, Inc.?
Geometric return = ((1 + .23)(1 + .11)( 1 - .05)(1 + .07)(1 + .10))^1/5 - 1 = 8.83%
The security market line depicts the graphical relationship between which of the following pairs? I. expected return II. surprise return III. systematic risk IV. unsystematic risk
I and III
Which of the following will increase the expected risk premium for a security, all else constant? I. an increase in the security's expected return II. a decrease in the security's expected return III. an increase in the risk-free rate IV. a decrease in the risk-free rate
I and IV only
Which of the following sources of information are used by informed traders? I. financial statements II. inside information III. internet reports IV. analysts reports
I, III, and IV only
Samson Co. announced its merger plans on October 25 and had a daily return of .5 percent. Thompson Co. announced its merger plans on October 26 and had a daily return of .8 percent. The Whitewood Co. announced its merger plans on October 27 and had a daily return of −.4 percent. The daily market returns for October 25 through October 27 were .2, −.3, and .4, respectively. What is the combined cumulative abnormal return for all companies who announced mergers from October 25 through October 27?
Merger date: 25-Oct Market Return: .20% Announcement Date: .50% Abnormal: .30% Merger date: 26-Oct Market Return: −.30% Announcement Date: .80% Abnormal: 1.10% Merger date: 27-Oct Market Return: .40% Announcement Date: −.40% Abnormal: −.80% .30 + 1.10 -.80 = .60 Cumulative Abnormal Return =.60%
If the market is semistrong form efficient, then which one of the following statements is true?
Neither technical nor fundamental analysis leads to abnormal profits.
JJ Industries will pay a regular dividend of $1.20 per share for each of the next four years. At the end of four years, the company will also pay out a liquidating dividend. If the discount rate is 8%, and the current share price is $52, what must the liquidating dividend be?
P(0) = $1.20/( 1.08 )^1 + $1.20/( 1.08 )^2 + $1.20/( 1.08 )^3 + $1.20 /( 1.08 )^4 + LD/( 1.08 )^4 = $52 $48.03 = LD/( 1.08 )^4 LD = $65.34
Xytex Products just paid a dividend of $1.67 per share, and the stock currently sells for $36. If the discount rate is 10%, what is the dividend growth rate?
P(0) = $36 = ($1.67 (1 + g)) / ( .10 - g) g = 5.12%
Star Light & Power increases its dividend 4.3% per year every year. This utility is valued using a discount rate of 14%, and the stock currently sells for $43 per share. If you buy a share of stock today and hold on to it for at least three years, what do you expect the value of your dividend check to be three years from today?
P(0) = $43 = D1 / ( .14 - .043 ) D1 = $4.17 D3 = $4.17 (1 + .043)^2 = $4.54
Could I Industries just paid a dividend of $1.52 per share. The dividends are expected to grow at a rate of 16% for the next five years and then level off to a growth rate of 5% indefinitely. If the required return is 14%, what is the value of the stock today?
P(0) = ($1.52 (1.16) / (.14 - .16)( 1 - (1.16 / 1.14)^5) + (1.16 / 1.14)^5 ($1.52 (1.05) / ( .14 - .05)) P(0) = $27.35
Leisure Lodge Corporation is expected to pay the following dividends over the next four years: $18.00, $10.00, $8.00, $2.60. Afterwards, the company pledges to maintain a constant 6% growth rate in dividends forever. If the required return on the stock is 12%, what is the current share price?
P(4) = $2.60( 1.06 ) / (.12 - .06) = $45.93 P(0) = $18.00 / 1.12 + $10.00 / 1.12^2 + $8.00 / 1.12^3 + ($2.60 + 45.93) / 1.12^4 = $60.58
Carter Communications does not currently pay a dividend. You expect the company to begin paying a dividend of $3.20 per share in 8 years, and you expect dividends to grow perpetually at 4.2% per year thereafter. If the discount rate is 15%, how much is the stock currently worth?
P(7) = D8 / (k - g) = $3.20 / (.15 - .042) = $29.63 P(0) = P7 / (1 + k)^7 = $29.63 / (1.15)^7 = $11.14
Given the information below for Seger Corporation, compute the expected share price at the end of 2020 using price ratio analysis. Assume that the historical (arithmetic) average growth rates will remain the same for 2020.
PE ratio values are: 18.24, 16.50, 13.52, 11.37, 10.79, 11.31 Average = 13.62 EPS growth rates: 21.19%, 19.70%, 14.40%, 41.19%, 12.74% Average = 21.85% Expected share price using PE: 13.62 ($8.85)(1.2185) = $146.88 P/CFPS values are: 7.52, 7.51, 7.13, 5.76, 6.88, 7.45 Average = 7.04 CFPS growth rates: 9.85%, 3.36%, 18.98%, 12.22%, 9.18% Average = 10.72% Expected share price using P/CFPS = 7.04($13.44)(1.1072) = $104.79 P/S values are: 1.96, 1.85, 1.85, 1.62, 1.68, 1.72 Average = 1.78 SPS growth rates: 16.03%, -1.66%, 9.83%, 28.64%, 15.90% Average = 13.75% Expected share price = 1.78 ($58.30)(1.1375) = $117.95 A reasonable price range would seem to be $118 to $147 per share.
The current price of Parador Industries stock is $65 per share. Current earnings per share is $2.80, the earnings growth rate is 5%, and Parador does not pay a dividend. The expected return on Parador stock is 15%. a. Calculate the earnings per share one year ahead. b. Calculate the PE ratio one year ahead.
Parador's expected future stock price is $65 x 1.15 = $74.75. Expected future earnings per share is $2.80 x 1.05 = $2.94 Parador's expected future PE ratio is $74.75 / $2.94 = 25.43
What is the percentage of a firm's earnings that is distributed to shareholders called?
Payout ratio
A stock has had the following year-end prices and dividends: Year Prices Dividends 0 $16.00 -- 1 18.18 $ .15 2 19.18 .33 3 17.68 .35 4 20.02 .36 5 23.13 .43 What are the arithmetic and geometric returns for the stock?
R(1) =($18.18 - 16 + .15) / $16 = 14.56% R(2) =($19.18 - 18.18 + .33) / $18.18 = 7.32% R(3) =($17.68 - 19.18 + .35) / $19.18 =-6.00% R(4) ($20.02 - 17.68 + .36) / $17.68 = 15.27% R(5) =($23.13 - 20.02 + .43) / $20.02 = 17.68% R(A) =(.1456 + .0732 - .0600 + .1527 + .1768) / 5 =9.77% R(G) =((1 + .1456)(1 + .0732)(1 - .0600)(1 + .1527)(1 + .1768))^1/5 - 1 =9.41%
A stock has returns of -8%, 14%, 9%, 16%, and -4%. What are the arithmetic and geometric returns?
R(A): (-.08 + .14 + .09 + .16 - .04) / 5 R(A) = 5.40% R(G): ((1 - .08)(1 + .14)(1 + .09)(1 + .16)(1 - .04)) ^1/5 - 1 R(G) = 4.95%
The unadjusted total percentage return on a security that has not been compared to any benchmark is referred to as which one of the following?
Raw return
Johnson Products earned $5.04 per share last year and paid a dividend of $1.95 per share. If ROE was 12%, what is the sustainable growth rate?
Retention ratio = 1 - ($1.95 / $5.04) = .6131 Sustainable growth rate = 12% ( .6131 ) = 7.36%
Stock Y has a beta of .80 and an expected return of 15.85 percent. Stock Z has a beta of .70 and an expected return of 6 percent. If the risk-free rate is 6.0 percent and the market risk premium is 10.0 percent, what are the reward-to-risk ratios of Y and Z?
Reward-to-risk ratio Y = (.1585 − .060) / .80 = .1231, or 12.31% Reward-to-risk ratio Z = (.060 − .060) / .70 = .0000, or .00%
The risk premium of a portfolio divided by the portfolio's standard deviation defines which one of the following performance measures?
Sharpe Ratio
Joker stock has a sustainable growth rate of 12%, ROE of 19%, and dividends per share of $3.30. If the PE ratio is 17.7, what is the value of a share of a stock?
Sustainable growth = ROE (r) = .12 = .19r r = .6316 Since r is the retention ratio, the payout ratio is: Payout ratio = 1 - .6316 = .3684 EPS = D / Payout ratio = $3.30 / .3684 EPS = $8.96 P(0) = EPS (PE) = $8.96(17.7) = $158.54
According to the systematic risk principle, the reward for bearing risk is based on which one of the following types of risk?
Systematic
If the forecast return is less (greater) than the required rate of return, the security is overvalued (undervalued).
T
Fill in the missing information assuming a correlation of .30. Risk & Return with Stocks & Bonds: Portfolio Weights Stocks Bonds E(R) Std. Dev. 1.00 -- 12.00% 21.00% 0.80 -- -- -- 0.60 -- -- -- 0.40 -- -- -- 0.20 -- -- -- 0.00 -- 7.00% 12.00%
The answers for the varying weights are computed using the following methodology. As an example, assume the portfolio weight of stocks is 80%. E(Rp) = .8( .12) + .2( .07) = 11.00% Std. Dev.(p) = (( .8)^2( .21)^2 + ( .2)^2( .12)^2 + 2( .8)( .2)( .21)( .12)( .3))^.5 = 17.67%
On November 14, Thorogood Enterprises announced that the public and acrimonious battle with its current CEO had been resolved. Under the terms of the deal, the CEO would step down from his position immediately. In exchange, he was given a generous severance package. Given the information below, calculate the cumulative abnormal return (CAR) around this announcement. Assume the company has an expected return equal to the market return. Date Mar. Return(%) Co. Return(%) Nov 7 1.4 1.0 Nov 8 1.2 1.0 Nov 9 −1.1 −.3 Nov 10 −.6 −.5 Nov 11 2.2 1.0 Nov 14 −1.0 2.7 Nov 15 .1 .1 Nov 16 .9 1.6 Nov 17 1.1 .5 Nov 18 −1.1 .0 Nov 19 1.2 .2
To find the cumulative abnormal returns, we chart the abnormal returns for the days preceding and following the announcement. The abnormal return is calculated by subtracting the market return from the stock's return on a particular day, Ri − RM. Calculate the cumulative average abnormal return by adding each abnormal return to the previous day's abnormal return. Days DailyAb Cu.Ab −5 −.4 −.4 −4 −.2 −.6 −3 .8 .2 −2 .1 .3 −1 −1.2 −.9 0 3.7 2.8 1 .0 2.8 2 .7 3.5 3 −.6 2.9 4 1.1 4.0 5 −1.0 3.0
Suppose you bought 400 shares of stock at an initial price of $53 per share. The stock paid a dividend of $.58 per share during the following year, and the share price at the end of the year was $54. Compute your total dollar return on this investment.
Total dollar return =400($54 - 53 + .58) = $632 Whether you choose to sell the stock does not affect the gain or loss for the year; your stock is worth what it would bring if you sold it. Whether you choose to sell it or not is irrelevant (ignoring commissions and taxes).
Suppose you bought 300 shares of stock at an initial price of $39 per share. The stock paid a dividend of $.32 per share during the following year, and the share price at the end of the year was $42. Compute your total dollar return on this investment.
Total dollar return = 300($42 - 39 + .32) = $996 Whether you choose to sell the stock does not affect the gain or loss for the year; your stock is worth what it would bring if you sold it. Whether you choose to sell or not is irrelevant (ignoring commissions and taxes).
Using the information provided on the two stocks in the table above, find the expected return and standard deviation on the minimum variance portfolio. 3 Doors, Inc. Down Co. Expected return, E(R) 19% 10% Standard deviation 34% 22% Correlation .43
W3 Doors = (.22^2 - .34 x .22 x .43)/( .34^2 + .22^2 - 2 x .34 x .22 x .43 ) = .16289 WDown = (1 - .16289) = .83711 E(Rp) = .16289 ( .19) + .83711 ( .10) = 11.47% Variance(p^2) = .16289^2 ( .34^2) + .83711^2 ( .22^2) + 2( .16289)( .83711)( .34)( .22)( .43) = .04575 St. Dev.(p) = .04575^.5 = 21.39%
A stock fund has a standard deviation of 28% and a bond fund has a standard deviation of 16%. The correlation of the two funds is .15. What is the approximate weight of the stock fund in the minimum variance portfolio?
X*S = [.16^2 − (.28 × .16 × .15)]/[.28^2 + .16^2 − (2 × .28 × .16 × .15)] = 20.85% (~21%)
You are given the following information concerning three portfolios, the market portfolio, and the risk-free asset: Portfolio Rp σp βp X 11.5% 38% 1.70 Y 10.5 33 1.30 Z 7.2 23 .85 Market 10.9 28 1.00 Risk-free 4.6 0 0 What are the Sharpe ratio, Treynor ratio, and Jensen's alpha for each portfolio?
XSharpe = (.115 − .046) / .38 = .18158 XTreynor = (.115 − .046) / 1.70 = .04059 XJensen's alpha = .115 − [.046 + (.109 − .046)1.70] = −.0381, or -3.81%
A stock has a beta of 1.1 and an expected return of 13 percent. A risk-free asset currently earns 3.7 percent. a. What is the expected return on a portfolio that is equally invested in the two assets? b. If a portfolio of the two assets has a beta of .23, what are the portfolio weights? c. If a portfolio of the two assets has an expected return of 12.25 percent, what is its beta? d. If a portfolio of the two assets has a beta of 1.32, what are the portfolio weights?
a. E(Rp) = (.13 + .037) / 2 = 8.35% b. βp = .23 = xS(1.10) + (1 − xS)(0) xS = .23 / 1.1 = 20.91% xRf = 100% − 20.91% = 79.09% c. E(Rp) = .1225 = .13xS + .037(1 − xS) xS = .9194 xRf = 1 − .9194 = .0806 βp = .9194(1.1) + .0806(0) = 1.0113 d. βp = 1.32 = xS(1.1) + (1 − xS)(0) xS = 1.32 / 1.1 = 120.00% xRf = 100% − 120.00% = −20.00% The portfolio is invested 120.00% in the stock and −20.00% in the risk-free asset. This represents borrowing at the risk-free rate to buy more of the stock.
Suppose you bought 200 shares of stock at an initial price of $38 per share. The stock paid a dividend of $.30 per share during the following year, and the share price at the end of the year was $41. a. What is the capital gains yield? b. What is the dividend yield? c. What is the total rate of return on the investment?
a. Capital gains yield = ($41 - 38) / $38 =7.89% b. Dividend yield = $.30 / $38 =.79% c. Total rate of return = 7.89% + .79% = 8.68%
Suppose you bought 700 shares of stock at an initial price of $39 per share. The stock paid a dividend of $.32 per share during the following year, and the share price at the end of the year was $34. a. Compute your total dollar return on this investment. b. What is the capital gains yield? c. What is the dividend yield? d. What is the total rate of return on the investment?
a. Dollar return = 700($34 - 39 + .32) = -$3,276 b. Capital gains yield = ($34 - 39) / $39 = -12.82% c. Dividend yield = $.32 / $39 = .82% d. Total rate of return = -12.82% + .82% = -12.00%
Suppose you bought 950 shares of stock at an initial price of $54 per share. The stock paid a dividend of $.62 per share during the following year, and the share price at the end of the year was $49. a. Compute your total dollar return on this investment. b. What is the capital gains yield? c. What is the dividend yield? d. What is the total rate of return on the investment?
a. Dollar return =950($49 - 54 + .62) =-$4,161 b. Capital gains yield =($49 - 54) / $54 = -9.26% c. Dividend yield = $.62 / $54 = 1.15% d. Total rate of return = -9.26% + 1.15% = -8.11%
Suppose you bought 300 shares of stock at an initial price of $46 per share. The stock paid a dividend of $44 per share during the following year, and the share price at the end of the year was $47. a. What is the capital gains yield? b. What is the dividend yield? c. What is the total rate of return on the investment?
a. capital gains yield = ($47 - 46) / $46 = 2.17% b. dividend yield = $.44 / $46 = .96% c. total rate of return = 2.17% + .96% = 3.13%
Which one of the following terms is used to describe a market situation where prices are much higher than either fundamental or rational analysis would tend to support?
bubble
Which one of the following statements is correct concerning the dividend yield and the total return? a. the dividend yield can be zero while the total return must be a positive. b. the dividend yield exceeds the total return when a stock increases in value. c. the total return can be negative but the dividend yield cannot be negative. d. the total return plus the capital gains yield is equal to the dividend yield. e. the total return must be greater than the dividend yield.
c. the total return can be negative but the dividend yield cannot be negative.
Which one of the following terms is used to identify the NYSE rules which slow or stop trading when the DJIA declines by more than a specified amount during a trading session?
circuit breakers
Which one of the following terms is used to describe a sudden and significant collapse in market prices?
crash
Which one of the following holds that investors cannot consistently earn positive abnormal returns?
efficient market hypothesis
Correlation is the:
extent to which the returns on two assets move together.
In an efficient market, stocks with similar risks will:
have similar rates of return.
Growth stocks are typically described as having which one of the following characteristics?
high P/E ratios
Which one of the following is a collection of possible risk-return combinations available from portfolios consisting of individual assets?
investment opportunity set
Which one of the following is required for a trader to earn abnormal profits? abnormal trading excessive research highly volatile market state market inefficiency relatively stable market state
market inefficiency
Which one of the following terms best describes the information you know about a company that will have a significant effect on the price of the company's stock once that information is released?
material nonpublic information
Which one of the following best describes the type(s) of information included in a strong form efficient market?
private and public
Tom is an engineer for Talbot Tech and has just discovered a revolutionary method for strengthening metals. He knows this knowledge will add value to Talbot Tech's stock. Tom happens to mention this discovery and its value to his neighbor, Fred. Fred can be charged with insider trading if he:
provides this information to a friend who will trade the stock and split the profits with him.
Which one of the following terms is used to describe a stock price that moves over time creating no discernible pattern?
random walk
The principal of diversification involves investing in a variety of assets with which one of the following being the primary goal?
reducing some of the risk
In an efficient market, daily abnormal returns:
reflect news since the prior trading day.
What is the percentage of a firm's net income which is reinvested in the firm to support future growth called?
retention ratio
What is the extra compensation paid to an investor who invests in a risky asset rather than in a risk-free asset?
risk premium
The rate of return earned on a US T-Bill is frequently used as a proxy for the:
risk-free rate.
Stocks A, B, and C have identical risks. Stock A earns an annual return of 9.9 percent as compared to 9.6 percent returns on stocks B and C. Given this, you can correctly assume that:
stock A has a positive abnormal return.
The method of valuing a stock based on the present value of the future income derived from that stock is called:
the dividend discount model
The standard deviation is a measure of:
volatility
The stock of Bruin, Inc., has an expected return of 20 percent and a standard deviation of 29 percent. The stock of Wildcat Co. has an expected return of 12 percent and a standard deviation of 38 percent. The correlation between the two stocks is .38. Calculate the expected return and standard deviation of the minimum variance portfolio.
wBruin = (.38^2 − .38 × .29 × .38) / (.38^2 + .29^2 − 2 × .38 × .29 × .38) = .7083 wWildcat = 1 − .7083 = .2917 E(Rp) = .7083(.20) + .2917(.12) = 17.67% σp^2 = .7083^2(.29^2) + .2917^2(.38^2) + 2(.7083)(.2917)(.29)(.38)(.38) = .07178 σp = .07178^.5 = 26.79%
Asset K has an expected return of 11 percent and a standard deviation of 26 percent. Asset L has an expected return of 9 percent and a standard deviation of 21 percent. The correlation between the assets is .21. What are the expected return and standard deviation of the minimum variance portfolio?
wK = (.21^2 − .26 × 21 × .21) / (.26^2 + .21^2 − 2 × .26 × .21 × .21) = .3676 wL = 1 − (.3676) = .6324 E(Rp) = .3676(.11) + .6324(.09) = 9.74% σp^2 = .3676^2(.26^2) + .6324^2(.21^2) + 2(.3676)(.6324)(.26)(.21)(.21) = .0321 σp = .0321^.5 = 17.92%
You analyze a firm's financial statements and invest based upon the results of this analysis. Which form of market efficiency may exist if you are able to earn abnormal profits on these investments?
weak form
Ann uses two approaches to trading stocks. First, she trades on what she believes is a repetitive pattern as seen in Dotson Co.'s historical prices. Secondly, she analyzes the financial statements of The Allen Co. to compute changes in the return on equity as a predictor of future stock prices for that firm. She trades based on both strategies. Ann earns abnormal profits on her return on equity strategy but not on her historical prices strategy. This suggests that the market is at least ________ efficient but less than ________ efficient.
weak form; semistrong form
Efficient markets tend to exist:
when rational arbitrage traders dominate irrational traders.
Capital gains are included in the return on an investment:
whether or not the investment is sold.
If the future return on a security is known with absolute certainty, then the risk premium on that security should be equal to:
zero
You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.31 and the total portfolio is exactly as risky as the market, what must the beta be for the other stock in your portfolio?
βp = 1.0 = 1/3(0) + 1/3(1.31) + 1/3(βX) βX = 1.69
The expected return and standard deviation of a portfolio that is 70 percent invested in 3 Doors, Inc., and 30 percent invested in Down Co. are the following: 3 Doors, Inc. Down Co. Exp. return, E(R) 12% 10% Standard dev., σ 45 34
σp2 = .70^2(.45^2)+ .30^2(.34^2) + 2(.70)(.30)(.45)(.34)(1.00) = .17389 σp = .17389^.5 = 41.70% σp^2 = .70^2(.45^2)+ .30^2(.34^2) + 2(.70)(.30)(.45)(.34)(0) = .10963 σp = .10963^.5 = 33.11% σp^2 = .70^2(.45^2)+ .30^2(.34^2) + 2(.70)(.30)(.45)(.34)(-1.0) = .04537 σp = .04537^.5 = 21.30%
