Investments test 2
Owning two securities instead of one will not reduce the risk taken by an investor if the two securities are
Perfectly positively correlated with each other
When the covariance is positive, the correlation will be:
Positive
Discounted cash flow techniques used in valuing common stock are based on:
Present value analysis
The estimated value of common stock is the:
Present value of all expected cash flows
Value Line's 1 to 5 stock ranking system of timeliness refers to:
Probable relative price performance within the next 12 months
Securities with betas greater than 1 should have:
Required returns higher than the markets returns
The _____ is 1 plus the total return
Return relative
An efficient market is defined as one in which:
Securities prices quickly and fully reflect all available information
Security A and Security B have a correlation coefficient of 0. If security A's return is expected to increase by 10 percent,
Security B's return is impossible to determine from the above information
Over the period of 1926-2007, which of the following financial assets showed the greatest amount of price volatility. as measured by standard deviation?
Small-cap stocks
The ____ is a plot of ___
Sml .... Individual securities and efficient portfolios
Based on recent history, an investor would probably have a lower risk level with a portfolio consisting of:
Some stocks and some bonds
Portfolio risk is most often measured by professional investors using the
Standard deviation
The highest level of market efficiency is:
Strong form efficiency
The recent housing bubble and resulting credit crisis of 2008 is a perfect example of:
Systematic risk
The only asset class to provide systematic protection against inflation is
TIPS
Tests of the semi-strong EMH include:
Tests of the speed of adjustment of stock prices to company announcements
Book value is:
The accounting value of the firm as reflected in the financial statements
TF: If there is less efficiency in emerging markets than in developed markets, there should be higher performance in emerging markets than in developed markets.
True
TF: In a semistrong form efficient market, investors are not able to use publicly availably financial statement data to earn abnormal returns
True
TF: It is generally easier to predict interest risk than market risk
True
TF: Most professional investors use the S&P 500 as a general gauge of total market performance
True
TF: Other things equal, the higher the required return, the lower the P/E
True
TF: Relatively small changes in inputs in DDM can change the estimated value by large percentage amounts
True
TF: S&P's Outlook reports intrinsic value for stocks based on a combination of relative valuation and discounted cash flow analysis
True
TF: Testing of the CAPM suggests the trade-off between expected return and risk is an upward-sloping straight line.
True
TF: The APT is based on the law of one price, which states two identical assets cannot sell at different prices
True
TF: The CML indicated the required return for each portfolio risk level
True
TF: The characteristic line is the regression fitting total returns for a stock against total returns for the market, and is sometimes calculated using excess returns
True
TF: The efficiency of markets is driven largely by the vast number of participants and their quick and easy access to information
True
TF: The standard deviation of returns, calculated as the square root of the variance of returns, is a measure of total risk of an asset or portfolio
True
TF: Under the weak form of the EMH, technical analysis relying on the history of price information is of no value in trying to outperform the future market
True
TF: Under the zero-ground dividend model, expected dividends are the same as current dividends
True
TF: Unlike the CAPM, the APT does not assume borrowing and lending at the risk-free rate
True
TF: With the APT, risk is defined in terms of a stock's sensitivity to basic economic factors
True
TF: With the introduction of risk-free borrowing and lending changes the nature of the original Markowitz efficient frontier by turning the efficient frontier into a straight line
True
TF: you would expect a lower PSR for a retail company than for a biotechnology company
True
Under the multiple growth model, at least _______ dividend growth rates are used
Two
The random walk hypothesis is most related to the:
Weak-form EMH
The expected value is the:
Weighted average of all possible outcomes
The price/sales ratio indicates:
What the market is willing to pay for a firm's revenues
When the markowitz model assumes that most investors are considered to be risk averse, this really means they
Will not take a "fair gamble"
If you invest in German bonds and the Euro becomes stronger during your holding period, then:
Your dollar-denominated return will increase
As a measure of market risk the beta of the s&p 500 is generally considered to be
1
TF: Calendar market anomalies include the neglected firm effect, which means few analysts follow the stock, or few institutions own the stock.
False
TF: If the intrinsic value of stock is greater than the current stock price, the stock is overvalued and should be sold short.
False
TF: In a declining market, a portfolio manager should attempt to increase the overall beta of the portfolio
False
TF: International mutual funds offer investors global diversification without exchange rate risk
False
TF: Like CAPM, APT does not assume a single period investment horizon, no taxes, borrowing and lending at the RF rate, and investors selecting portfolios based on expected return and variance
False
TF: Morningstar reports a "fair value" for stocks based on a relative valuation analysis
False
TF: New regulations concerning auto emissions would be a type of market risk for the auto industry
False
TF: None of the asset-pricing models assume that the market is perfect
False
TF: Overall, the low P/E strategy should be viewed as a short run strategy
False
TF: Return and risk are inversely related
False
TF: Tests of the strong-form EMH include studies of corporate insiders and event studies
False
TF: The "new economy" stocks of the 19902, such as the experience of eToys, proved conclusively that old valuation principles do not apply today
False
TF: The evidence obtained on weak-form efficiency casts serious doubts on fundamental analysis
False
TF: The less the variability of return, the greater the risk
False
TF: The most common measure of inflation is the producer price index
False
TF: The most volatile stocks have beta's near zero
False
TF: Value investing implies investors should always buy stocks with the lowest P/E ratios
False
TF: another name for a capital gain is yield
False
TF: relative valuation methods tend to be more sophisticated, more formal and less intuitive than discounted cash flow techniques
False
TFIn the case of a four-security portfolio, there will be 8 covariances
False
As the dollar falls,
Foreign investors owning U.S stocks suffer
In order to determine the compound growth rate of an investment over some period, an investor would calculate the:
Geometric mean
Under the separation theorem, all investors should:
Hold the same portfolio of risky assets and the same expected return but at different levels of risk
Company specific risk is also known as
Idiosyncratic risk
Generally speaking, if interest rates fall and other factors remain constant, the P/E ratio of most companies will:
Increase
The weak form of the EMH is supported if successive price changes over time are:
Independent of each other
According to the behavioral finance, markets are always:
Informationally inefficient
Markowitz's main contribution to portfolio theory is:
Insight about the relative importance of variance and covariance in determining portfolio risk
Indifference curves reflect ____ while the efficient set of portfolios represent ______
Investor preferences; portfolio possibilities
The paradox of efficient market is that:
Investors attempting to uncover and use information about security prices help make the market more efficient (I.E., an "efficient amount of inefficiency")
Evidence concerning the "overreaction hypothesis" indicates that:
Investors sometimes act rationally
Weak Form Market Efficiency:
Involves price and volume information
The zero-growth dividend model:
Is equivalent to the valuation model for preferred stock
What is the result of the widespread usage of the Internet with regards to efficient markets?
It makes information cheaper and more accessible thus making markets more efficient
What is the major problem with the Markowitz model?
Its complexity
Under the CMT, the relevant risk to consider with any security is:
Its covariance with the market portfolio
According to Markowitz, an efficient portfolio is one that has the
Largest expect return for a given level of risk
The APT is based on the:
Law of one price
An international index commonly used as a proxy for international equities that correlates approximately 80 percent with the S&P 500
MSCI emerging markets index
because of increasing correlation between U.S. markets and foreign markets, most professional investors now recommend
Maintaining some reasonable exposure to foreign markets
A less restrictive form of the Single Index Model is the:
Market Model
The slope of the CML is the:
Market price of risk for efficient portfolios
Systematic risk is also called:
Market risk
The relevant risk for a well-diversified portfolio is
Market risk
______ Is concerned with the interrelationships between security returns as well as the expected returns and variances of those returns
Markowitz diversification
A major difference between the dividend discount model (DDM) and the free cash flow to equity model (FCFE) is that the FCFE:
Measure both dividend growth and stability and the DDM only measures the dividend growth
The capital asset pricing model:
Measures relevant risk of a security and shows the relationship between risk and expected return
The single index model divides a security's return into ___ and ___ parts
Micro; macro
Asset allocation is one of the most widely used applications of:
Modern portfolio theory
The dividend model that is most appropriate for a young company that pays small dividends now but is expected to increase dividends in a few years is the:
Multiple growth model
The return relative solves the problem of:
Negative returns
Under the multi index model the industry relationship to stock prices would be assessed by the
Nonmarket factor
Debont and Thayler (1985)'s overreaction hypothesis tends to:
Not support the weak form of the EMH
Which of the following would be considered a random variable? A) expected value B) Correlation coefficient between two assets C) One-period rate of return for an asset D) beta
One-period rate of return for an asset
Economic value added is the difference between:
Operating profits and cost of capital
under the p/e model, stock price is a product of:
P/E ratio and EPS
Relative valuation measures commonly used by market participants today include:
P/E ratio, Price/Boob value, and Sales/Price ratios
All "known" information means:
Past, current, and inferred information
the optimal portfolio is the efficient portfolio with the
highest utility
If interest rates rose, you would expect ____ to also rise
inflation risk
The disposition effect relates to the fact that:
investors are more likely to sell winners than losers
Liquity risk
is a risk associated with secondary market transactions
Several analyst and empiricist recommend investing in stocks with what kind of price to book value ratios?
low
An impeding recession is an example of
market risk
A company has a price to sales ratio of 1.0, annual sales of $1 billion and 100 million shares of common stock outstanding. Its stock price is:
$10
Seaside toys currently earns $2.00 per share and currently pays $1.00 per share in dividends. It is expected to have a constant growth rate of 5% per year. The required rate of return is 15%. What is the intrinsic value of this stock?
$10.50
WWW company current (t=0) earns $4.00 per share, and has a payout of 40%. Dividends are expected to grow at a constant rate of 4 percent per year. The required rate of return is 15%. The price of this stock would be estimated at:
$15.13
XYZ company has expected earnings of $3.00 for next year and usually retains 40% for future growth. Its dividends are expected to grow at a rate of 10 percent indefinitely. If an investor has a required rate of return of 15%, what price would he be willing to pay for XYZ stock?
$36.00
What is the estimated value of a stock with a required rate of return of 12 percent a projected constant growth rate of dividends of 7 percent and expected dividend of $2.50
$60
Two stocks with perfect negative correlation will have a correlation coefficient of
-1
Total return as defined in the text is:
measured by dividing the sum of all cash flows received by the amount invested
Stockholders that own more than ____% of a company's stock are considered insiders by the SEC
10%
The expected market return is 9 percent. The risk-free rate of return is 1 percent, and XYZ Co. has a beta of 1.4. The risk premium is:
11.2 percent
Analyst often us a _____% rule in security valuation in recognition of the fact that estimating a security's value is an inexact process
15%
The expected market return is 16 percent. The risk-free rate of return is 7 percent, and BC Co. has a beta of 1.1. Their required rate of return is:
16.9 percent
It is recommended that investors interested in the EVA approach should seek companies that have a return of capital in excess of _____ because this will likely exceed the cost of capital and the company is, therefore, adding value
20
The expected return on the market for next period is 11%. the risk free rate of return is 4 percent, and Alpha Company has a beta of 1.1. The market risk premium is:
7%
A firm has net income of $1 million with 250,000 shares outstanding with a total market value of $8 million. What is the P/E ratio?
8
The S&P 500 typically is usually correlated at what percent with the MSCI EAFE index
90%
According to the weak form of the EMH,
: successive price changes are independent
Based on the PSR rule of thumb, if PSR is less than 1, the stock is:
A bargain
Value stocks, such as those considered the DOgs of the Dow, will generally have
A low P/E ratio
With a discrete probability distribution
A probability is assigned to each possible outcome
Which of the following is not one of the assumptions of portfolio theory? A) Liquidity of positions B) Investor preferences are based only on expected return and risk C) low transactions costs D) A single investment period
A single investment period
Which of the following would not be considered a source of systematic risk A) a hostile takeover B) A rise in inflation C) A fall in GDP D) a panic on wall street
A) A hostile takeover
Which of the following portfolios has the least reduction of risk? A) A portfolio with securities all having positive correlation with each other B) A portfolio with securities all having zero correlation with each other C) A portfolio with securities all having negative correlation with each other D) A portfolio with securities all having skewed correlation with each other
A) A portfolio with securities all having positive correlation with each other
Risk factors in the APT must possess all of the following characteristics except: A) Factors must be readily observable in risk/return space B) Each factor must have a pervasive influence on stock returns C) The factors must influence expected return D) Factors must be unpredictable
A) Factors must be readily observable in risk/return space
Which of the following situations indicates a signal to buy a stock? A) IV > CMP B) IV < CMP C) IV = CMP D) impossible to determine
A) IV > CMP
Which of the following is NOT a test of semi-strong form efficiency? A) Insider transactions B) Stock splits C) accounting changes D) Dividend announcements
A) Insider transactions
Which of the following is not true regarding the markowitz theory A) Markowitz portfolio theory is considered a three-parameter model B) Under the Markowitz model, no portfolio on the efficient frontier dominated any other portfolio on the efficient frontier C) The Markowitz model is cumbersome to work with due to the large variance-covariance matrix needed for a set of stocks D) Markowitz portfolio theory is a multi-period model generates an entire set, or efficient frontier, of portfolios
A) Markowitz portfolio theory is considered a three-parameter model
In order to determine the expected return of a portfolio, all of the following must be known, except: A) probabilities of expected returns of individual assets B) Weight of each individual asset to total portfolio value C) expected return of each individual asset D) variance of return of each individual asset and correlation of returns between assets
A) Probabilities of expected returns of individual assets
Select the incorrect statement regarding the CML A) the CML is an equilibrium relationship for efficient portfolios and individual securities. B) The CML represents the risk-return tradeoff in equilibrium for efficient portfolios. C) The intercept of the CML is the reward per unit of time available to investors for deferring consumption D) Standard deviation is the measure of risk which determines a portfolio's equilibrium return
A) The CML is an equilibrium relationship for efficient portfolios and individual securities
Which of the following is true regarding the size anomaly? A) as much as 50% of small cap outperformance is associated with the January effect B) Small cap stocks underperform large cap stocks in recent years C) Small cap stocks outperformance is a NASDAQ phenomenon, not NYSE D) Small cap stock outperformance is unaffected by micro-cap, commission, or liquidity (I.e., bid-ask spread) concerns.
A) as much as 50% of small cap outperformance is associated with the January effect
Which of the following statements regarding indifference curves is not true? A) investors have a finite number of indifference curves B) The greater the slope of the indifference curve, the greater the risk aversion of investors C) the indifference curves for all risk-averse investors will be upward sloping D) indifference curves cannot intersect
A) investors have a finite number of indifference curves
Which of the following is not one of the reasons two investors both using the constant growth version of the DDM on the same stock might arrive at different estimated of the stock's value? A) they used different expected returns B) They used different growth rates of dividens C) They used different required returns D) They assume a different payout ratio
A) they used different expected returns
What statement is generally true regarding portfolio risk and number of stocks
Adding more stocks decreases risk but does not eliminate it
The SML can be used to analyze the relationship between risk and required return for:
All assets
An indifference curve shows:
All combinations of portfolios that are equally desirable to a particular investor
If markets are truly efficient and in equilibrium
All securities would lie on the SML
With a continuous probability distribution ___
An infinite number of possible outcomes exist
Indifference curves
Are convex
Under the Markowitz model, investors:
Are not allowed to use leverage
When most people refer to mean rate of return, they are referring to the:
Arithmetic average rate of return
Which of the following is a market anomaly? A) A relationship between money supply growth and stock prices B) A relationship between P/E ratios and subsequent stock returns C) Independence of stock price changes D) Adjustment of stock prices due to accounting changes
B) A relationship between P/E ratios and subsequent stock returns
Which of the following changes will likely lead to a higher P/E, assuming other factors are equal? A) A decrease in the dividend payout ratio B) An increase in growth rate of earnings C) An increase in the required rate of return D) A decrease in the dividend yield
B) An increase in growth rate of earnings
Which of the following statements about the difference between the SML and the CML is true? A) The intercept of the CML is the origin while the intercept of the SML is RF B) CML consists of efficient portfolios, while the SML is concerned with all portfolios or securities. C) CML could be downward sloping while that is impossible for the SML. D) CML and the SML are essentially the same except in terms of the securities represented
B) CML consists of efficient portfolios, while the SML is concerned with all portfolios or securities
All of the following are interchangeable terms except for: A) Discount rate B) coupon rate C) required rate of return D) Capitalization rate
B) Coupon rate
Which of the following models incorporates debt financing, including both the repayment and interest on existing debt as the sale of new debt, as well as preferred stock financing? A) FCFE model B) FCFF model C) constant growth rate model D) Multiple growth rate model
B) FCFF model
Which of the following statements is true regarding the efficiency of foreign securities and foreign markets? A) Foreign securities tend to be more analyzed than U.S. securities B) Foreign markets tend to be less efficient than U.S. markets C) Foreign markets often lag behind U.S. markets as much as 6 months. D) Foreign markets tend to be as efficient as U.S. markets
B) Foreign markets tend to be less efficient than U.S. markets
Which of the following statement regarding P/E ratios is true? A)Generally, the riskier the stock, the higher the P/E ratio. B) In recent year the small capitalization stocks had the highest P/E ratios C) As interest rates increase, P/E ratios are expected to decline D) Higher growth prospects often lead to lower P/E ratios
B) In recent year the small capitalization stocks had the highest P/E ratios
All of the following conditions must occur for a market to be considered efficient except: A) Information is costless and widely available to market participants at approximately the same time B) Information is generated in a specific fashion such that announcements are basically dependent on each other. C) There are a large number of rational, profit-maximizing investors who actively participate in the market D) Investors react quickly and fully to the new information, causing stock prices to adjust accordingly
B) Information is generated in a specific fashion such that announcements are basically dependent on each other.
Which of the following regarding investors and the CMT is true? A) Investors recognize that all the assumptions of the CMT are unrealistic B) Investors recognize that all of the CMT assumptions are not unrealistic C) Investors are not aware of the assumptions of the CMT model D) Investors recognize the CMT is useless for individual investors
B) Investors recognize that all of the CMT assumptions are not unrealistic
Select the correct statement regarding the market portfolio: A) is readily and precisely observable B) is a risky portfolio C) is the lowest point of tangency between the risk-free rate and the efficient frontier D) should be composed of stocks or bonds
B) Is a risky portfolio
Which of the following is not one of the reasonable conclusions of the CAPM reached by a consensus of the empirical results? A) The intercept term is generally higher than the RF B) The SML appears to be non-linear C) The slope of the CAPM is generally less steep than suggested by the theory. D) CAPM is an imperfect model for the explanation of the cross section of security returns
B) The SML appears to be non-liner
We can expect that the U.S. Stock markets will be efficient for all of the following reasons EXCEPT: A) A large number of rational, maximizing investors exist who actively participate in the U.S. market by analyzing, valuing, and trading stocks. B) The U.S. economy is the largest in the world, with the most sophisticated investors C) Information is costless and widely available to market participants at approximately the same time. D) Investors react quickly and fully to the new information, causing stock prices to adjust accordingly
B) The U.S. economy is the largest in the world, with the most sophisticated investors
Which of the following is true regarding random diversification A) Investment characteristics are considered important in random diversification B) The benefits of random diversification eventually no longer continue as more securities are added C) Random diversification, if done correctly, can eliminate all risk in a portfolio D) Random diversification eventually removes all company specific risk from a portfolio
B) The benefits of random diversification eventually no longer continue as more securities are added
Which of the following statements is true regarding TIPS A) As inflation changes, the interest rate on the bond is adjusted B) The correlation between TIPS and the S&P 500 index has often been negative C) TIPS are more volatile than regular treasury bonds of similar maturity D) TIPS always pay a premium over inflation
B) The correlation between TIPS and the S&P 500 index has often been negative
Which of the following statements concerning the equity risk premium is true? A) some scholars think it is too low B) There is no direct way to measure it C) It predicts high future returns on stocks D) It is expected to increase in the future
B) There is no direct way to measure it
Which of the following is an assumption of the CMT? A) Single investors can affect the market by their buying and selling decisions B) There is no inflation C) Investors prefer capital gains over dividends D) Different investors have different probability distributions
B) There is no inflation
Which of the following is true regarding the cumulative wealth index? It: A) is measured by adding up the total returns over the holding period and dividing by the investment B) Uses a beginning index value (often set to $1 but it can be set to any amount) C) is the present value of the future cash flows expected from the investment D) uses the arithmetic mean as the rate of growth of one's wealth
B) Uses a beginning index value (often set to $1 but it can be set to any amount)
If interest rates are expected to rise, you would expect
Bond prices to fall more than stock prices
Select the FALSE statement concerning efficient markets A) The current price of a stock reflects all known information B) Investors will use all relevant data in making their decisions C) A perfect adjustment in price follows any new information D) Following any adjustment, the new price does not have to be the new equilibrium price.
C) A perfect adjustment in price follows any new information
The arbitrage pricing theory (APT) and the CAPM both assume all except the following? A) Investors have homogeneous beliefs B) Investors are risk-averse utility maximizers C) Borrowing and lending can be done at the rate RF D) Markets are perfect.
C) Borrowing and lending can be done at the rate RF
Which of the following statements regarding intrinsic value and market price is true? A) if intrinsic value is greater than the current market price, the stock should be avoided or, if already held, sold. B) If intrinsic value is less than the current market price, the stock is undervalued. C) If intrinsic value is equal to the current market price, the stock is correctly valued. D) If the intrinsic value is greater than the current market price, the stock is considered speculative
C) If intrinsic value is equal to the current market price, the stock is correctly valued.
Which of the following is true regarding the Markowitz model as covered in this chapter A) it fully addresses the use of leverage B) investors must have homogeneous expectations about model parameters C) Investors must be better off if they invest in portfolios to the Northwest of the efficient frontier D) Markowitz diversification is inefficient diversification
C) Investors must be better off if they invest in portfolios to the Northwest of the efficient frontier
Which of the following is true regarding the expected return of a portfolio? A) it is a weighted average only for stock portfolios B) It can only be positive C) It can never be above the highest individual asset return D) It is always below the highest individual asset return
C) It can never be above the highest individual asset return
Which of the following statements regarding expected returns of a portfolio is true? A) It can be higher than the weighted average expected return of individual assets B) It can be lower than the weighted average return of the individual assets C) It can never be higher or lower than the weighted average expected return of individual assets D) Expected return of a portfolio is impossible to calculate
C) It can never be higher or lower than the weight average expected return of individual assets
Which of the following statements regarding the correlation coefficient is NOT true? A) it is a statistical measure B) It measures the relationship between two securities' returns C) it determines the causes of the relationship between two securities' returns D) It is greater than or equal to -1 and less than or equal to +1
C) It determines the causes of the relationship between two securities' returns
Which of the following is a problem using dividend discount model to value common stock? A) The model does not account for the risk of the stock B) The model does not consider the present value of the dividends C) The model does not consider that dividends may not be paid D) The model does not account for small dividends
C) The model does not consider that dividends may not be paid
Which of the following is not one of the assumptions of the CMT? A) All investors have the same one-period time horizon B) There are no personal income taxes C) There is no interest rate charged on borrowing D) There are no transaction costs
C) There is no interest rate charged on borrowing
Which of the following statements concerning price to book value is true A) There is an inverse relationship between price to book values and market prices B) It is calculated as the ratio of price to the book value of assets C) There is supporting evidence that stocks with low price to book values significantly outperform the market D) Price to book value ratios for many stocks range from 5.5 to 10.5
C) There is supporting evidence that stocks with low price to book values significantly outperform the market
Which of the following is generally used as a proxy for the risk-free rate of return? A) savings account B) Certificate of deposit C) Treasury bill D) Treasury Bond
C) Treasury Bill
Which of the following might be used as a factor in an APT factor model? A) The risk-free rate B) Expected inflation C)Unanticipated deviations from expected inflation D) Loss by fire at a company's manufacturing plant
C) Unanticipated deviations from expected inflation
Which of the following is frequently used to test the semi-strong form of the EMH? A) statistical tests of stock-price change independence B) Tests of specific trading rules that use past price data C) event studies D) insider returns
C) event studies
A change in the correlation coefficient of the returns of two securities in a portfolio causes a change in? A) both the expected return and the risk of the portfolio B) Only the expected return of the portfolio C) Only the risk level of the portfolio D) Neither the expected return nor the risk level of the portfolio
C) only the risk level of the portfolio
Which of the following is the correct calculation for the required rate of return under the CAPM? A) beta (market risk premium) B) beta + market risk premium C) risk-free rate + risk premium D) risk-free rate(Market risk premium)
C) risk-free rate + risk premium
Which of the following statements regarding the arithmetic mean and the geometric mean is true? A) the arithmetic mean is always a better measure of average performance B) The geometric mean is always a better measure of average performance C) the arithmetic mean is a better measure of performance over single periods D) The geometric mean is teh best estimate of the expected return for the next period
C) the arithmetic mean is a better measure of performance over single periods
All of the following represent the yield component of total return EXCEPT: A. Dividend payment on common stock B. Coupon interest payment on bonds C. Capital gain upon sale of stock D. Dividend payment on preferred stock
C. Capital gain upon sale of stock
Portfolio weights are found by
Calculating the percentage of each asset's value to the total portfolio value
Probability distributions: A) are always discrete B) are always continuous C) Can be either discrete or continuous D) are inverse to interest rates
Can be either discrete or continuous
Total return is equal to?
Capital gain - loss
According to the random walk hypothesis, price(s):
Changes over time are independent
Under the market model, the regression line that results when the return of a security is plotted against the market index return is the:
Characteristic line
A number of prominent observers expect the equity risk premium in the future to be:
Considerably lower than that of the past
The arbitrage pricing theory (APT):
Considers more factors than the CAPM and is a broader model
The bell-shaped curve, or normal distribution, is considered:
Continuous
All of the following are considered market anomalies except: A) size effect B) January effect C) Earnings announcement anomaly D) Accounting changes effect
D) Accounting changes effect
Which of the following announcements has NOT been involved in a direct test of the semi-strong form of the EMH? A) Dividend announcements B) Accounting changes C) Stock splits D) Corporate insiders' actions
D) Corporate insiders' actions
With regard to market efficiency, identify the INCORRECT statement. A) Information is the central issue of the efficient markets concept B) The most stringent form of market efficiency is the strong form C) The efficient market concept does not require a perfect adjustment in price following new information D) Tests of the usefulness of price data are semi-strong form tests
D) Tests of the usefulness of price data are semi-strong form tests
Infinite growth is a problem with the dividend discount model because: A) the expected stream of dividends is infinite B) At reasonably high discount rates, such as 12 percent, dividends received in the distant future (40 or 50 years from now) are worth very little today C) Dividend growth rates eventually become very small D) The statement is incorrect - Infinite growth is not a problem with the dividend discount model because at reasonably high discounts rates, such as 12 percent, dividends received in the distant future are worth very little today
D) The statement is incorrect - Infinite growth is not a problem with the dividend discount model because at reasonably high discounts rates, such as 12 percent, dividends received in the distant future are worth very little today
Which of the following markets is generally considered to be the most efficient: A) China B) India C)Russia D) U.S.
D) U.S.
Which of the following variables has an inverse relationship with the P/E ratio? A) payout ratio B) Expected growth rate of dividends C) Expected growth rate of earnings D) required rate of return
D) required rate of return
TF when using the Markowitz model, aggressive investors would select portfolios on the left of the efficient frontier
False
TF: A belief in the size-effect anomaly should encourage investors to buy large-firm stocks
False
TF: A security that plots above the SML would be a good security to sell short
False
TF: An investor who believes in the strong form of the EMH should be an active investor
False
TF: Beta is a measure of systematic risk and relates one security's return to another security's return
False
Choose the portfolio from the following set that is not on the efficient frontier A: expected return of 10 percent; standard deviation of 8 percent B: Expected return of 18 percent; standard deviation of 13 percent C: expected return of 38 percent; standard deviation of 38 percent D: expected return of 15 percent; standard deviation of 14 percent
D: expected return of 15 percent; standard deviation of 14 percent
The benefits of international diversification have ____ since 1995
Decreased
Present value is based on the concept of:
Discounting
If the Dow Jones Industrials had a price appreciation of 6 percent one year and yet total return for the year was 9 percent, the difference would be due to:
Dividends
Studies cited in the text show technical trading rules based on price and volume data lead to investment timing decisions that:
Do not provide excess returns after all brokerage costs are deducted
A relatively new valuation technique that emphasizes the difference between a firm's operating profits and its cost of capital is called:
Economic value added model
The constant growth dividend model uses the:
Estimated growth rate in dividends
What does it mean when the CAPM is called "robust?"
Even if most of the assumptions of the CAPM are relaxed, most of the conclusions will still hold.
_____, The CML can be downward sloping
Ex post
According to Markowitz, rational investors will seek efficient portfolios because theres portfolios are optimal based on
Expected return and risk
TF Asset allocation accounts for less than 50 percent of the variance in quarterly returns for a typical pension fund
False
TF Because of its complexity, the markowitz model is no longer used by institutional investors
False
TF Like the CAPM, the APT assumes a single-period investment horizon.
False
TF Markowitz derived the efficient frontier as an upward-sloping straight line
False
TF Portfolio risk is a weighted average of the individual security risks
False
TF it would be impossible to combine an asset allocation plan with Markowitz analysis
False
TF real estate has never been shown to be positively correlated with the performance of stocks
False
TF the correlation coefficient explains the cause in the relative movement in returns between two securities
False
TF the sharpe model was found to outperform the Markowitz model in longer time periods
False
The major difference between the correlation coefficient and the covariance is that
The correlation coefficient is a relative measure showing association between security returns and the covariance is an absolute measure showing association between security returns
The equity risk premium is:
The difference between the expected return on stocks and the risk-free rate
Investors should be willing to invest in riskier investments only if..
The expected return is adequate for the risk level
The separation theorem states that:
The investment decision is separate from the financing decision
A lady bought 100 shares of a leading diamond mining company with an expected return of 20 percent per year. The following day the company's president announced a major new discovery in Arkansas. The stock price immediately doubled. This scenario probably best illustrates:
The lady was lucky
When markets are in equilibrium, the CML will be upward sloping because...
The price of risk must always be positive
The constant growth rate model of the DDM implies that:
The stock price grows at the same rate as dividends
If a certain stock has a beta greater the 1.0, it means that:
The stock's return is more volatile than that of the market portfolio
When returns are perfectly positively correlated, the risk of the portfolio is
The weighted average of the individual securities risk
Different investors will estimate the inputs to the markowitz model differently because:
There is an inherent uncertainty in security analysis
The best return measure to use if you are trying to measure the total effect of returns over time given some stated beginning amount is the:
Total return
TF A major assumption of the Markowitz model is that investors base their decisions strictly on expected return and risk factors
True
TF A well diversified portfolio will typically consist of a mix of small, mid and large cap stocks, both U.S. and foreign, as well as corporate and U.S. Treasury bonds, real estate and commodities
True
TF According to the law of large numbers, the larger the sample size, the more likely it is that the sample mean will be close to the population expected value
True
TF Portfolio risk can be reduced by reducing portfolio weights for assets with positive correlations
True
TF Standard deviations for well-diversified portfolios are reasonably steady over time
True
TF There are many ways to measure EPS
True
TF a negative correlation indicates that the returns of two securities have a tendency to move in opposite directions
True
TF a probability distribution shows the likely outcomes that may occur and the probabilities associated with these likely outcomes
True
TF academic research shows asset allocation decisions explain approximately 90% of the variation in returns in a portfolio, whereas individual security analysis, including "stock picking," explains only about 10%
True
TF in a portfolio consisting of two perfectly negatively correlated securities, the highest attainable expected return will consist of a portfolio containing 100% of the asset with the highest expected return
True
TF investments in commodities such as precious metals may provide additional diversification opportunities for portfolios consisting primarily of stocks and bonds
True
TF the single index model requires (3n+2) total pieces of data to implement
True
TF throwing a dart at the WSJ and selecting stocks on this basis would be considered random diversification
True
TF under the markowitz model, the risk of a portfolio is measured by the standard deviation of the portfolio return
True
TF: A Chinese stock denominated in Chinese yuan will have an increase in its dollar-denominated return if the Chinese Yuan Strengthens against the dollar
True
TF: A number of companies that formerly experienced rapid growth were unable to sustain high growth rates. These companies included Cisco, Dell, Yahoo, and Google.
True
TF: An earning announcement effect would not be considered a good test of the weak form of the EMH
True
TF: Bond prices and interest rates are inversely related
True
TF: Both present value and future value are based upon the concept of the time value of money
True
TF: Companies with significant intangible assets on their balance sheets may receive a slightly lower P/E ratio versus companies with Difficult assets
True
TF: EVA analysis reflects an emphasis on risk-adjusted return on capital
True
TF: Holding interest rates constant, a narrowing of the equity risk premium implies a decline in the rate of return on stocks because the amount earned beyond the risk-free rate is reduced
True
TF: If the growth rate in dividends is greater than the required rate of return, the price found under the constant growth model will be negative.
True
Portfolios lying on the upper right portion of the efficient frontier are likely to be chosen by
aggressive investors
To implement the single-index model, estimates of the ____ for each stock are needed
beta
New financial disclosure regulations affecting the brokerage industry are a type of:
business risk
political stability is the major factor concerning:
country risk
If an investor searches for patterns in security returns by examining various techniques applied to a set of data and then applying the technique that works, this is know as:
data mining
If a U.S investor buys foreign stock, his dollar-denominated return will increase if the dollar:
depreciates in value
Positive theory refers to a theory that:
describes how economic participants act
A portfolio which lies below the efficient frontier is described as
dominated
With the single index model the difference between actual return and expected return given particular market index is refereed to as the
error term
TF If all investors use the constant growth dividend model to value the same stock, they will all arrive at the same estimate of value
false
TF The markowitz model does not depend on the assumption of normally distributed security returns
false
TF based on recent research, it seems reasonable that approximately 10-20 securities are needed to ensure adequate diversification
false
Based on the research related to market anomalies, investors should prefer:
high SUE, low P/E stocks
According to the semi-strong form of the EMH, investors who invest in a stock after a highly positive announcement concerning the stock can expect to earnL
normal return because the stock will be fairly priced when purchased
The optimal portfolio for a risk-averse investor:
occurs at the point of tangency between the highest indifference curve and the efficient set of portfolios
A major difference between real and nominal returns is that:
real returns adjust for inflation and nominal returns do not
The single-index model implies stocks covary only because of their common:
relationship to the market
The January effect concerns:
small cap stocks
Financial risk is most associated with
the use of debt financing by corporations
If a market is inefficient, as new information is received about a security:
there will be a lag in the adjustment of the stock price
The standard deviation measures:
total risk of a security
TF if an analyst uses ex post data to calculate the correlation coefficient and covariance and uses them in the markowitz mode, the assumption is that past relationships will continue in the future
true
TF unlike discounted cash flow techniques, relative valuation does not require comparitively strong assumptions about the inputs that lead to an estimates of stock value
true
TF: Declining interest rates in the market should send P/E ratios, on average high
true
TF: The CML states that all investors should invest in the same portfolio of risky assets
true
