Principles of Finance Exam 3 Multiple Choice (Chapters 8, 9, 10)

The dividend discount model: is a valuation approach based on future dividend income. is a hybrid security that has characteristics of both long-term debt and common stock. expects to have above average rates of growth in revenue, earnings, and/or dividends. none of the above.

is a valuation approach based on future dividend income.

The size of the firm measured as the current stock price multiplied by the number of shares outstanding is referred to as the firm's market capitalization. book value. market makers. constant growth model.

market capitalization.

In theory, which of these is a combination of securities that places the portfolio on the efficient frontier and on a line tangent from the risk-free rate? efficient market market portfolio probability distribution stock market bubble

market portfolio

Which of these is the portion of total risk that is attributable to overall economic factors? firm specific risk market risk modern portfolio risk total risk

market risk

Which of these is the reward for taking systematic stock market risk? required return risk-free rate risk premium market risk premium

market risk premium

According to the video, short-run projected wealth levels calculated using geometric averages are probably ______________. pessimistic optimistic. foolish. erroneous. confusing.

pessimistic

Which of these is defined as a combination of investment assets held by an investor? bundle market basket portfolio All of these choices are correct.

portfolio

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

portfolio beta

Which of these are valued as a special zero-growth case of the constant growth rate model? common stock preferred stock future dividends future stock prices

preferred stock

Which of these refers to something that has not been released to the public, but is known by few individuals, likely company insiders? audited financial statements restricted stock privately held information insider trading

privately held information

Which of these is the set of probabilities for all possible occurrences? probability probability distribution stock market bubble market probabilities

probability distribution

Which of the following is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc.? audited financial statements generally accepted accounting principles privately held information public information

public information

Investors buy stock at the dealer price. bid price. quoted ask price. broker price.

quoted ask price.

Shares of stock issued to employees that have limitations on when they can be sold are known as executive stock options. privately held information. restricted stock. stock market bubble.

restricted stock.

Which of the following is the reward investors require for taking risk? required return risk-free rate risk premium market risk premium

risk premium

Which of the following is typically considered the return on U.S. government bonds and bills and equals the real interest plus the expected inflation premium? required return risk-free rate risk premium market risk premium

risk-free rate

Expected return is the return on a _______ asset expected in the future. average risky no-risk risk-free portfolio

risky

Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation? market risk line probability market line security market line stock market line

security market line

The difference between the bid and ask prices is called the _________, and is the basic source of dealer profits. spread dealer ask required bid

spread

Investor enthusiasm causes an inflated bull market that drives prices too high, ending in a dramatic collapse in prices is known as behavior finance. efficient market. privately held information. stock market bubble.

stock market bubble.

Which of these investors earn returns from receiving dividends and from stock price appreciation? bondholders stockholders investment bankers managers

stockholders

The constant growth model assumes which of the following? that there is privately held information that the stock is efficiently priced that there are executive stock options available to managers that there is no restricted stock

that the stock is efficiently priced

The largest equities-based exchange in the world based on total market capitalization and listed securities is the: Chicago Board of Trade New York Mercantile Exchange New York Stock Exchange NASDAQ Trading House

New York Stock Exchange

Which of these is the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio? capital asset pricing line capital market line efficient market line efficient market hypothesis

capital market line

Which of these is a measure of risk to reward earned by an investment over a specific period of time? coefficient of variation market deviation standard deviation total variation

coefficient of variation

As residual claimants, which of these investors claim any cash flows to the firm that remain after the firm pays all other claims? creditors bondholders preferred stockholders common stockholders

common stockholders

Which of these is the term for portfolios with the highest return possible for each risk level? efficient portfolios modern portfolios optimal portfolios total portfolios

efficient portfolios

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

executive stock options.

Which of the following is the average of the possible returns weighted by the likelihood of those returns occurring? efficient return expected return market return required return

expected return

Which of the following is the use of debt to increase an investment position? behavioral finance financial leverage probability stock market bubble

financial leverage

Which of the following is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification? firm specific risk market risk modern portfolio risk total risk

firm specific risk

Stock valuation model dynamics make clear that higher growth rates lead to lower valuations. higher valuations. lower growth rates continuing. higher growth rates continuing.

higher valuations.

Stock valuation model dynamics make clear that lower discount rates lead to lower valuations. higher valuations. lower growth rates. higher growth rates.

higher valuations.

The NASDAQ Composite includes all of the stocks listed on the NASDAQ Stock Exchange. 30 of the largest (market capitalization) and most active companies in the U.S. economy. 500 firms that are the largest in their respective economic sectors. 500 firms that are the largest as ranked by Fortune Magazine.

all of the stocks listed on the NASDAQ Stock Exchange.

Which of the following is a model that includes an equation that relates a stock's required return to an appropriate risk premium? asset pricing behavioral finance beta efficient markets

asset pricing

Trading at physical exchanges like the New York Stock Exchange and the American Stock Exchange takes place at dealers' trading posts. at brokers' trading posts. at dealers' computers. at market markers.

at brokers' trading posts.

Which of these is a measure summarizing the overall past performance of an investment? average return dollar return market return percentage return

average return

The study of the cognitive processes and biases associated with making financial and economic decisions is known as asset pricing model. behavioral finance. efficient market hypothesis. stock market bubble.

behavioral finance.

Which of these is a measure of the sensitivity of a stock or portfolio to market risk? behavioral finance beta efficient market hedge

beta

The price the dealer is willing to pay is called the ________ price. spread dealer ask required bid

bid

Investors sell stock at the dealer price. bid price. quoted ask price. broker price.

bid price.

A variable growth rate: is a valuation technique used when a firm's current growth rate is expected to change sometime in the future. combines the present-value cash flow equation and the constant-growth-rate model equation. both a and b neither a or b

both a and b

Which of the following is the asset pricing theory based on a beta, a measure of market risk? behavioral asset pricing model capital asset pricing model efficient markets asset pricing model efficient market hypothesis

capital asset pricing model

The line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio is____? capital market line expected return security market line financial leverage

capital market line

Portfolio Beta is the ______________ average of the Betas of the investments included in the portfolio. Weighted Arithmetic Geometric Riskless Expected

Weighted

The Dow Jones Industrial Average (DJIA) includes all of the stock listed on the New York Stock Exchange. 30 of the largest (market capitalization) and most active companies in the U.S. economy. 500 firms that are the largest in their respective economic sectors. 500 firms that are the largest as ranked by Fortune Magazine.

30 of the largest (market capitalization) and most active companies in the U.S. economy.

The Standard & Poor's 500 Index includes all of the stock listed on the New York Stock Exchange. 30 of the largest (market capitalization) and most active companies in the U.S. economy. 500 firms that are the largest in their respective economic sectors. 500 firms that are the largest as ranked by Fortune Magazine.

500 firms that are the largest in their respective economic sectors.

An asset pricing theory based on beta, a measure of risk is _____? The best known asset pricing equation Starts with the modern portfolio theory CAPM All of the above

All of the above

Which of the following characteristics describe the NASDAQ stock market? is an electronic stock market without a physical trading floor. ranks second behind the NYSE in terms of total dollar value. lists approximately 3,900 domestic and foreign companies. All of the above.

All of the above.

The security market line is a positively sloped straight line that displays the relationship between expected return and ____________. WACC Risk Portfolio Market Risk Premium Beta

Beta

At any given time, the market value of a firm's common stock depends upon: The company's profitability and the growth prospects for the future. The current market interest rates and the conditions in the overall stock market. Both a and b Neither a or b

Both a and b

The act of buying or selling the underlying asset via the option contract is called _______________ the option. Exposing Exercising Striking Selling Contracting

Exercising

A European option may be exercised anytime up to and including the expiration date. True False

False A European option may be exercised only on the expiration date.

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

Firms can quite possibly change their stocks' risk level by substantially changing their business.

Why is the ask price higher than the bid price? It represents the gain a market maker achieves. It represents the gain the stock seller achieves. It represents the gain the stock buyer achieves. It represents the gain all participants will achieve.

It represents the gain a market maker achieves.

Which of the following is an index that tracks 500 companies, which allows for a great deal of diversification? Nasdaq Fortune 500 S&P 500 Wall Street Journal

S&P 500

Sally wants to invest in only two stocks. Which pair of stocks should Sally select? Stocks A and B move downward at the same time. Stocks C and D move in opposite directions at the same time. Stocks E and F move upward at the same time. Stocks G and H move randomly at the same time.

Stocks C and D move in opposite directions at the same time.

The Capital Asset Pricing Model (CAPM) shows that the expected return for a particular asset depends on all of the following, except: The return on a risk-less asset The pure time value of money The reward for bearing systematic risk The amount of systematic risk

The return on a risk-less asset

Risk-free assets have a beta of 0 and the market portfolio has a beta of 1. True False

True

The geometric average return answers the question, What is the least amount of returns need to calculate an average? What was your return in an average year over a particular period? What is the best method to use to calculate your average return? What was your average compounded return per year over a particular period? What was your average return per year over a particular period?

What was your average compounded return per year over a particular period?

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

When people purchase a stock, they do not know what their return is going to be—either short term or in the long run.

Which of the following will only be executed if the order's price conditions are met? a trade a limit order an unlimited order a spread

a limit order

We can estimate a stock's value by using the book value of the total stockholder equity section. discounting the future dividends and future stock price appreciation. compounding the past dividends and past stock price appreciation. using the book value of the total assets divided by the number of shares outstanding.

discounting the future dividends and future stock price appreciation.

The process of putting money in different types of investments for the purpose of reducing the overall risk of the portfolio is _________? diversification the S&P 500 Index market risk the stock market

diversification

To find the percentage return of an investment multiply the dollar return by the investment's value at the beginning of the period. divide the dollar return by the investment's value at the beginning of the period. multiply the dollar return by the investment's value at the end of the period. divide the dollar return by the investment's value at the end of the period.

divide the dollar return by the investment's value at the beginning of the period.

Which of these includes any capital gain (or loss) that occurred as well as any income that you received from a specific investment? average return dollar return market return portfolio

dollar return

Which of these is a theory that describes the types of information that are reflected in current stock prices? asset pricing behavioral finance efficient market hypothesis public information

efficient market hypothesis

Which of the following is NOT a necessary condition for an efficient market? many buyers and sellers no prohibitively high barriers to entry free and readily available information available to all participants no trading or transaction costs

no trading or transaction costs

Which of the following is another term for market risk? firm specific risk modern portfolio risk nondiversifiable risk total risk

nondiversifiable risk

Which statement is NOT true regarding efficient portfolios? Combining stocks that move together over time does not offer much risk reduction. Combining stocks that do not move together provides a lot of risk reduction. both a and b are NOT true none of the above are NOT true

none of the above are NOT true

Which of these is the investor's combination of securities that achieves the highest expected return for a given risk level? efficient portfolio modern portfolio optimal portfolio total portfolio

optimal portfolio

Which of the following are the stocks of small companies that are priced below $1 per share? bargain stocks hedge fund stocks penny stocks stock market bubble stocks

penny stocks

Which of these is the dollar return characterized as a percentage of money invested? average return dollar return market return percentage return

percentage return

Dividend yield is defined as the last four quarters of dividend income expressed as a percentage of the par value of the stock. the last four quarters of dividend income expressed as a percentage of the current stock price. the last dividend paid expressed as a percentage of the current stock price. the next dividend to be paid expressed as a percentage of the current stock price.

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

Which of the following is defined as the volatility of an investment, which includes firm specific risk as well as market risk? diversifiable risk market risk standard deviation total risk

total risk

Many companies grow very fast at first, but slower future growth can be expected. Such companies are called Fortune 500 companies. blue chip companies. variable growth rate firms. constant growth rate firms.

variable growth rate firms.