Test 2
Ch. 10 T/F 12. The "New Economy" stocks of the 1990s, such as the experience of eToys, proved conclusively that old valuation principles do not apply today.
False
Ch. 10 T/F 13. Relative valuation methods tend to be more sophisticated, more formal and less intuitive than discounted cash flow techniques.
False
Ch. 10 T/F 14. Morningstar reports a "fair value" for stocks based on a relative valuation analysis.
False
Ch. 10 T/F 3. 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
Ch. 10 T/F 7. If the intrinsic value of stock is greater than the current stock price, the stock is overvalued and should be sold short.
False
Ch. 11 T/F 1. A general guideline is that investors should probably have at least 20 percent of their portfolio invested in emerging markets.
False
Ch. 11 T/F 10. The primary emphasis in fundamental security analysis is on expected sales of the company.
False
Ch. 11 T/F 11. Due to advances in technology and better understanding of stocks and financial markets, security analysts' estimates have become more accurate.
False
Ch. 11 T/F 13. Sector rotation would be very successful in a truly efficient market.
False
Ch. 11 T/F 14. Security analysts receive all of their information from the management of the company.
False
Ch. 11 T/F 3. The nominal risk-free rate of return is calculated by subtracting an expected inflation premium from the real risk-free rate of interest.
False
Ch. 11 T/F 9. Buy side analysts will more likely have a potential conflict of interest in a stock than a sell-side analyst.
False
Ch8. T/F 1. Because of its complexity, the Markowitz model is no longer used by institutional investors.
False
Ch8. T/F 10. It would be impossible to combine an asset allocation plan with Markowitz analysis.
False
Ch8. T/F 11. Real estate has never been shown to be positively correlated with the performance of stocks.
False
Ch8. T/F 12. Based on recent research, it seems reasonable that approximately 10-20 securities are needed to ensure adequate diversification.
False
Ch8. T/F 14. The Markowitz Model does not depend on the assumption of normally distributed security returns.
False
Ch8. T/F 2. When using the Markowitz model, aggressive investors would select portfolios on the left end of the efficient frontier.
False
Ch8. T/F 3. Markowitz derived the efficient frontier as an upward-sloping straight line.
False
Ch8. T/F 7. The Sharpe model was found to outperform the Markowitz model in longer time periods.
False
Ch8. T/F 8. Asset allocation accounts for less than 50 percent of the variance in quarterly returns for a typical pension fund.
False
Ch9. T/F 1. The most volatile stocks have beta's near zero.
False
Ch9. T/F 12. Like the CAPM, the APT assumes a single-period investment horizon.
False
Ch9. T/F 13. None of the asset-pricing models assume that the market is perfect.
False
Ch9. T/F 17. 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
Ch9. T/F 2. Using the separation theorem, it is necessary to match each investor's indifference curves with a particular efficient portfolio.
False
Ch9. T/F 4. A security that plots above the SML would be a good security to sell short.
False
Ch9. T/F 5. Beta is a measure of systematic risk and relates one security's return to another security's return.
False
Ch9. T/F 9. In a declining market, a portfolio manager should attempt to increase the overall beta of the portfolio.
False
Ch. 10 T/F 1. There are many ways to measure Earnings Per Share.
True
Ch. 10 T/F 10. Companies with significant intangible assets on their balance sheets may receive a slightly lower P/E ratio versus companies with Difficult assets.
True
Ch. 10 T/F 11. 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
Ch. 10 T/F 11. Declining interest rates in the market should send P/E ratios, on average, higher.
True
Ch. 10 T/F 12. You would expect a lower PSR for a retail company than for a biotechnology company.
True
Ch. 10 T/F 15. S&P's Outlook reports intrinsic value for stocks based on a combination of relative valuation and discounted cash flow analysis.
True
Ch. 10 T/F 2. Relatively small changes in inputs used in DDM can change the estimated value by large percentage amounts.
True
Ch. 10 T/F 4. Unlike discounted cash flow techniques, relative valuation does not require comparatively strong assumptions about the inputs that lead to an estimate of stock value.
True
Ch. 10 T/F 5. 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
Ch. 10 T/F 6. Under the zero-growth dividend model, expected dividends are the same as current dividends.
True
Ch. 10 T/F 8. Other things equal, the higher the required return, the lower the P/E.
True
Ch. 10 T/F 9. EVA analysis reflects an emphasis on risk-adjusted return on capital.
True
Ch. 11 T/F 12. Under new SEC rules adopted in 2002, price targets for stocks are to be shown.
True
Ch. 11 T/F 15. If security prices fully reflect all the relevant information that is available and usable, then a securities market is considered to be efficient.
True
Ch. 11 T/F 2. Market risk is the single most important risk affecting the price movements of common stocks.
True
Ch. 11 T/F 4. A utility stock is more likely to have a beta lower than the overall market.
True
Ch. 11 T/F 5. A common asset allocation for a number of institutional investors using only two asset classes is 60 percent equities and 40 percent bonds.
True
Ch. 11 T/F 6. One of the major benefits of employing a buy and hold strategy is the savings on trading costs.
True
Ch. 11 T/F 7. As evidence about the efficiency of stocks markets has grown, so have index funds.
True
Ch. 11 T/F 8. Index funds are considered relatively tax efficient since they rarely have short-term gains.
True
Ch8. T/F 13. 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
Ch8. T/F 4. A major assumption of the Markowitz model is that investors base their decisions strictly on expected return and risk factors.
True
Ch8. T/F 5. Under the Markowitz model, the risk of a portfolio is measured by the standard deviation of the portfolio return.
True
Ch8. T/F 6. The single index model requires (3n+2) total pieces of data to implement.
True
Ch8. T/F 9. 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
Ch9. T/F 10. Unlike the CAPM, the APT does not assume borrowing and lending at the risk-free rate.
True
Ch9. T/F 11. With the APT, risk is defined in terms of a stock's sensitivity to basic economic factors.
True
Ch9. T/F 14. The APT is based on the law of one price, which states two identical assets cannot sell at different prices.
True
Ch9. T/F 15. 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
Ch9. T/F 16. 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
Ch9. T/F 3. The CML indicates the required return for each portfolio risk level.
True
Ch9. T/F 6. The CML states that all investors should invest in the same portfolio of risky assets.
True
Ch9. T/F 7. Most professional investors use the S&P 500 as a general gauge of total market performance.
True
Ch9. T/F 8. Testing of the CAPM suggests the trade-off between expected return and risk is an upward-sloping straight line.
True
Ch. 10 32. 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:
a. $10 b. $20 c. $17.52 d. $22.00
Ch. 12 8. Which of the following markets is generally considered to be the most efficient:
a. China. b. India. c. Russia. d. U.S.
Ch. 14 4. A well-known and widely used system that classified industries for more than 60 years was the:
a. Commercial Industrial Classification system. b. National Industrial Classification system. c. Standard Industrial Classification system. d. American Industrial Classification system.
Ch. 12 22. According to the random walk hypothesis, price(s)
a. over time are independent of one another. b. changes over time are independent. c. levels over time are independent. d. changes today are dependent on yesterday's price changes.
Ch. 10 19. Based on PSR rule of thumb, if PSR is less than 1, the stock is:
a. over-priced b. a candidate for short-sale c. a bargain d. about to default
ch8. 22. With the Single-index model, the difference between actual return and expected return given a particular market index is referred to as the:
a. parameter b. unique part c. error term c. beta
Ch. 12 3. All "known" information means:
a. past information only. b. past and current information. c. past, current, and inferred information. d. past, current, inferred and relative information.
Ch. 10 26. 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
Ch. 14 8. Which life cycle stage generally sees industries improving their products, lowering prices, and start to attract considerable investment funds?
a. pioneering stage b. expansion stage c. stabilization stage d. maturity stage
Ch. 14 9. An investor at what stage of a company's life cycle typically stands to earn the highest return?
a. pioneering stage. b. expansion stage. c. stabilization stage. d. maturity stage.
ch8. 8. Indifference curves reflect -------------- while the efficient set of portfolios represent ---------------.
a. portfolio possibilities; investor preferences. b. investor preferences; portfolio possibilities. c. portfolio return; investor risk. d. investor preferences; portfolio return.
Ch. 10 2. The estimated value of common stock is the:
a. present value of all expected cash flows. b. present value of all capital gains. c. future value of all dividend payments. d. present value of all dividend payments.
Ch. 11 36. If security prices fully reflect all relevant information available and usable, a securities market is said to be:
a. rational. b. in equilibrium. c. effective. d. efficient.
Ch. 12 7. Tests of the semistrong EMH include:
a. regression analysis. b. correlation tests that compare the security returns to the overall market return. c. tests of the speed of adjustment of stock prices to company announcements. d. queuing line theory tests.
Ch. 13 17. Generally, when interest rates fall, bond prices
a. rise. b. fall. c. remain unchanged. d. rise or fall depending on the expected inflation premium.
Ch. 14 15. When conducting industry analysis, investors should consider the historical record of all the following except:
a. sales growth. b. earnings growth. c. interest rates. d. price performance.
Ch. 13 33. The earnings yield, which is used in the Fed model, is the:
a. same as the dividend yield. b. inverse of the dividend yield. c. same as the P/E ratio. d. inverse of the P/E ratio.
Ch9. 5. 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
Ch. 12 29. All of the following are considered market anomalies EXCEPT:
a. size effect b. January effect c. earnings announcement anomaly d. accounting changes effect
Ch. 13 21. Estrella and Mishkin (1996) developed a somewhat successful model to predict whether the economy is going into recession using what variable?
a. spread between the 10-year U.S. Treasury Inflation Protected Security and the 3- month T-Bill. b. spread between the 5-year U.S. Treasury Note and the 3-month T-Bill. c. spread between the 10-year U.S. Treasury Note and the 3-month T-Bill. d. spread between the 30-year U.S. Treasury Note and the 3-month T-Bill.
Ch9. 16. The slope of the CML is the:
a. standard deviation for efficient portfolios. b. market price of risk for efficient portfolios. c. risk-free rate. d. risk premium for the market portfolio.
Ch. 12 26. Which of the following is frequently used to test the semistrong 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.
Ch. 14 19. Regarding the qualitative aspects of industry analysis, the breakup of AT&T in 1984 would be considered a:
a. structural change. b. government effect. c. competitive effect. d. cyclical effect.
Ch. 12 18. According to the weak form of the EMH,
a. successive price changes are biased. b. successive price changes are dependent. c. specified trading rules can prove to be extremely useful in generating excess returns. d. successive price changes are independent.
ch8. 18. The single index model divides a security's return into _______ and ________ parts.
a. supply; demand b. control; non-control c. company-related; industry-related d. micro; macro
Ch. 12 15. Debont and Thayler (1985)'s overreaction hypothesis tends to:
a. support the weak form of the EMH. b. not support the weak form of the EMH. c. support the semistrong form of the EMH. d. not support the semistrong form of the EMH.
Ch9. 10. The separation theorem states that:
a. systematic risk is separate from unsystematic risk. b. individual security risk is separate from portfolio risk. c. the investment decision is separate from the financing decision. d. borrowing portfolio is separate from the lending portfolio.
ch8. 25. Asset allocation is one of the most widely used applications of:
a. the Capital Asset Pricing Model. b. random diversification. c. passive portfolio approach. d. modern portfolio theory.
Ch. 13 24. If someone was to tell you that "the market" was up by two percent, they are usually referring to:
a. the DJIA. b. the NYSE. c. the NASDAQ. d. GDP.
Ch. 13 14. The federal agency most involved with the money supply and interest rates is
a. the Treasury Department b. the Federal Reserve c. the Department of Commerce d. the U. S. Mint
Ch. 10 14. XYZ Company has expected earnings of $3.00 for next year and usually retains 40 percent 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 percent, what price would he be willing to pay for XYZ stock?
a. $12.50 b. $25.00 c. $30.00 d. $36.00
Ch. 13 28. Assume that the dividend payout ratio on the S&P 500 will be 40 percent when the rate on long-term government bonds falls to 9 percent. Investors being risk averse demand an equity risk premium of 8 percent. If the growth rate of dividends is expected to be 10 percent, what will be the price of the market index if the earnings expectation is $30?
a. $384.00 b. $213.44 c. $266.56 d. $171.43
Ch. 10 15. WWW Company currently (t = 0) earns $4.00 per share, and has a payout of 40 percent. Dividends are expected to grow at a constant rate of 4 percent per year. The required rate of return is 15 percent. The price of this stock would be estimated at
a. $57.14. b. $22.86. c. $15.13. d. $24.69.
Ch. 10 16. 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 percent per year. The required rate of return is 15 percent. What is the intrinsic value of this stock?
a. $6.67 b. $7.00 c. $10.00 d. $10.50
Ch. 10 13. 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?
a. $60 b. $15 c. $150 d. $5
ch8. 19. As a measure of market risk, the beta for the S&P 500 is generally considered to be:
a. -1.0 b. 1.0 c. 0 d. impossible to determine
Ch. 13 4. The Bureau of Economic Analysis of the U.S. Government releases advance estimates of quarterly GDP in the first month following quarter end. In the second month, it provides a preliminary estimate. In the third, it provides a "final" estimate (though even this estimate is subject to annual revisions). Over the past 30 years, the average revision of GDP growth rate from advance to final has been approximately what fraction of a percentage point?
a. 1/4. b. 1/3. c. 1/2. d. 2/3.
Ch. 13 1. U.S. investors can buy equities from companies that comprise more than what fraction of the world's market capitalization and what fraction of the world's GDP.
a. 1/5th world market cap, 1/4th world GDP b. 1/4th world market cap, 1/3rd world GDP c. 1/3rd world market cap, 1/2 world GDP d. 1/2 world market cap, 2/3rds world GDP
Ch. 10 37. 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.
a. 10 b. 20 c. 30 d. 40
Ch. 12 16. Stockholders that own more than ____% of a company's stock are considered insiders by the SEC.
a. 10 b. 20 c. 30 d. 40
Ch. 14 2. Standard & Poor's new Global Industry Classification system divides everything into _________economic sectors.
a. 10 b. 24 c. 68 d. 154
Ch. 11 7. A bear market is one characterized by a decline of:
a. 10% or more. b. 15% or more. c. 20% or more. d. 25% or more.
Ch. 13 5. The advance estimate of GDP predicts direction of quarterly change in real GDP growth approximately what percent of the time?
a. 10%. b. 25%. c. 75%. d. 90%.
Ch. 14 3. Standard and Poor's new Global Industry Classification System already includes _______ companies.
a. 10,000 + b. 25,000+ c. 50,000 + d. 75,000+
Ch9. 21. 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
a. 17.6 percent. b. 16.0 percent. c. 16.9 percent. d. 23.0 percent.
Ch. 13 27. The ability of the market to predict economic recoveries is remarkably good. Stock prices almost always turn up how many months before recovery?
a. 3-5, with 4 typical. b. 3-7, with 5 typical. c. 4-8, with 6 typical. d. 5-9, with 7 typical.
Ch. 10 24. A firm has net income of $1 million with 250,000 shares outstanding with a total market value of $8 million. What is its P/E ratio?
a. 4 b. 8 c. 16 d. 32
Ch. 10 18. Analysts often use a ________% rule in security valuation in recognition of the fact that estimating a security's value is an inexact process.
a. 5 b. 10 c. 15 d. 20
Ch. 11 3. From 1989 to April 2003, the Japanese stock market lost what percent of its value?
a. 50 b. 60 c. 70 d. 80
Ch. 11 37. The Coffeehouse Portfolio suggests investors hold:
a. 50% bonds, 50% equities (including the S&P 500, Large Cap Value, International, Small Cap, and Small Cap Value stocks) b. 40% bonds, 60% equities (including the S&P 500, Large Cap Value, International, Small Cap, Small Cap Value, and REITs) c. 60% bonds, 40% equities (in two index funds) d. 40% bonds, 60% equities (in two index funds)
Ch. 13 7. In the U.S. since the end of World War II, the typical business cycle consists of an expansion of how many months?
a. 57. b. 66. c. 75. d. 84.
Ch. 11 1. A general consensus of analysts is that a typical investor should have between ___ and ______ percent of his/her portfolio in international markets.
a. 5: 10 b. 10: 20 c. 20: 30 d. 30: 40
Ch. 13 8. In the U.S. since the end of World War II, the typical business cycle contraction consists of how many months?
a. 6. b. 10. c. 12. d. 15.
Ch. 11 2. For adequately diversified common stock portfolios, market effects often account for -------- percent and more of the variability of the portfolio's return.
a. 60 b. 70 c. 80 d. 90
Ch9. 20. The expected return on the market for next period is 11 percent. The risk free rate of return is 4 percent, and Alpha Company has a beta of 1.1. The market risk premium is
a. 7.7 percent. b. 7 percent. c. 11 percent. d. 12.1 percent.
ch8. 33. The S&P 500 typically is usually correlated at what percent with the MSCI EAFE Index
a. 70% b. 80% c. 90% d. 95%
Ch9. 22. 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
a. 8 percent. b. 11.2 percent. c. 12.2 percent. d. 10.3 percent
Ch. 10 27. 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
Ch. 12 1. 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, profit-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.
Ch. 12 28. 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.
ch8. 20. Choose the portfolio from the following set that is not on the efficient frontier.
a. A: expected return of 10 percent; standard deviation of 8 percent b. B: expected return of 18 percent; standard deviation of 13 percent c. C: expected return of 38 percent; standard deviation of 38 percent d. D: expected return of 15 percent; standard deviation of 14 percent
Ch9. 2. 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.
ch8. 28. 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
Ch. 12 34. 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 stock 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.
Ch9. 18. The _________ is a plot of __________.
a. CML . . . individual stocks and efficient portfolios b. CML . . . both efficient and inefficient portfolios, only c. SML . . . individual securities and efficient portfolios d. SML . . . individual securities, inefficient portfolios, and efficient portfolios.
Ch. 14 16. Which of the following statements about the industry life cycle is incorrect?
a. Companies may stay in one phase for a significant period of time . b. All industries can be classified very accurately into a specific phase. c. The general framework may not apply to some industries. d. This approach does not explicitly lead to a stock price determination.
Ch. 12 31. 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
Ch. 10 23. Under the P/E model, stock price is a product of:
a. EPS and DPS b. P/E ratio and EPS c. EPS and required return d. P/E ratio and required return
Ch9. 8. __________, the CML can be downward sloping.
a. Ex post b. When investors are risk-lovers c. When the SML is upward sloping d. When the risk premium for the market is very high
Ch. 14 21. Which of the following types of industries is likely to be least affected in a recession?
a. Expansionary b. Interest-rate sensitive c. Defensive d. Countercyclical
Ch. 10 22. 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
Ch9. 29. Risk factors in the APT must possess all of the following the 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.
Ch. 12 13. 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.
Ch. 10 28. Which of the following statements regarding P/E ratios is true?
a. Generally, the riskier the stock, the higher the P/E ratio. b. In recent years, 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.
Ch. 14 18. Which of the following is NOT among the qualitative factors that should be analyzed to assess an industry's future?
a. Historical performance b. Competition c. Growth rate of sales d. Structural changes
Ch. 10 20. 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.
Ch. 10 17. 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.
Ch. 12 6. 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.
Ch. 12 19. 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.
Ch. 12 17. 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
ch8. 6. 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
Ch9. 28. 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.
Ch9. 4. 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.
ch8. 27. The only asset class to provide systematic protection against inflation is:
a. bonds b. real estate c. foreign stocks d. TIPS
Ch. 14 12. Which of the following is a limitation of the life cycle approach to security analysis?
a. It focuses on sales rather than stock prices. b. It focuses on the past more than the present. c. It does not consider the risk in the different cycles. d. It does not consider quantitative factors.
ch8. 17. 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
Ch. 12 4. What is the result of the widespread usage of the Internet with regards to efficient markets?
a. It makes information cheaper and more accessible thus making markets more efficient. b. It is subject to new regulation thus marking markets less efficient. c. It increases the volatility of security prices thus making markets less efficient. d. It increases competition among brokers thus making markets more efficient.
ch8. 3. 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
ch8. 32. An international index commonly used as a proxy for international equities that correlates approximately 80 percent with the S&P 500:
a. MSCI EAFE Index b. MSCI Emerging Markets Index c. Russell 1000 Index d. FTSE NAREIT Index
ch8. 16. 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 dominates 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
Ch. 14 23. Which of the following is not considered an interest-rate sensitive industry?
a. building industry b. banking industry c. financial services industry d. tobacco industry
Ch. 10 1. Relative valuation measures commonly used by market participants today include:
a. P/E ratio, Price/Book Value, and Sales/Price ratios b. Earnings per Share ratio c. Discounted Cash Flow d. Residual Income Valuation
Ch. 13 32. Which of the following statements regarding market P/E ratios is true?
a. P/E ratios are higher when interest rates are lower. b. P/E ratios are higher when interest rates are higher. c. P/E ratios are higher when inflation is higher. d. P/E ratios are lower when unemployment is higher.
Ch. 14 13. At what stage in the industry life cycle do financial policies become firmly established?
a. Pioneering stage b. Expansion stage c. Stabilization stage d. Declining stage
Ch. 11 25. ----------- shifts the weights of securities in the portfolio to take advantage of areas expected to do relatively better than others.
a. Portfolio management b. Technical analysis c. Momentum strategy d. Sector rotation
Ch9. 25. A less restrictive form of the Single Index Model is the:
a. Risk-free Model. b. CAPM. c. CML. d. Market Model.
Ch. 14 5. Which of the following has 10 economic sectors, 24 industry groupings, 64 industries and 139 sub-industries?
a. SIC b. NAICS c. GICS d. Value Line Investment Survey
Ch9. 26. Under the Market Model, the regression line that results when the return of a security is plotted against the market index return is the:
a. SML. b. CML. c. characteristic line. d. slope.
Ch. 11 32. ____________ funds are especially popular with momentum investors.
a. Sector b. Managed c. Global d. Index
Ch9. 3. 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..
Ch. 14 10. Which of the following is not one of the stages of the industry life cycle?
a. expansion b. destabilization c. declining d. pioneering
Ch9. 6. What does it mean when the CAPM is called "robust?"
a. The CAPM requires no assumptions. b. Even if most of the assumptions of the CAPM are relaxed, most of the conclusions will still hold. c. The CAPM is based on realistic assumptions. d. No other model can represent stock returns better than the CAPM.
Ch9. 19. 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.
Ch. 11 20. One of the most famous investment advisory services since 1965 is:
a. The Wall Street Journal b. Standard and Poor's Corporate Records c. Moody's d. Value Line Investment Survey
Ch. 13 19. _______ is a publication that compiles consensus economic forecasts.
a. The Wall Street Journal's Economic Letter b. The Conference Board's Economic Forecast c. The Kiplinger Letter d. Blue Chip Economic Indicators
Ch. 12 12. 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.
ch8. 24. To implement the single-index model, estimates of the _______for each stock are needed.
a. expected return b. standard deviation c. beta d. covariance
Ch. 10 6. 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 discount rates, such as 12 percent, dividends received in the distant future are worth very little today
Ch9. 9. 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.
Ch9. 27. 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.
Ch. 10 5. Which of the following is a problem using the 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.
Ch9. 30. 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
Ch. 11 17. Which of the following statements concerning index funds and actively managed funds is true?
a. Their performance is about equal. b. They tend to have an inverse relationship. c. Actively managed funds tend to outperform index funds. d. Index funds tend to outperform actively managed funds.
Ch. 11 15. Which of the following statements regarding a buy and hold strategy are true?
a. There are no selection choices to be made under this strategy. b. This strategy is applicable only to large portfolios. c. There is no reinvestment decision to make under this strategy. d. This strategy produces lower transactions and search costs.
Ch. 10 34. 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.
Ch. 11 29. Which of the following statements regarding defensive stocks is true?
a. They are often expected to have above-average future growth. b. They often have high P/E multiples. c. They are expected to be adversely affected by high interest rates. d. They often produce necessary items such as food and prescription drugs.
Ch. 10 12. 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 estimates of the stock's value?
a. They used different expected returns. b. They used different growth rates of dividends. c. They used different required returns. d. They assume a different payout ratio.
Ch. 13 22. Stock prices often peak when?
a. Two years before the start of a recession. b. One year before the start of a recession. c. At the start of a recession. d. One year after the start of a recession.
Ch. 13 6. The period from a peak to a trough is:
a. a cycle. b. an inflection point. c. a recession. d. a depression.
Ch. 13 9. The National Bureau of Economic Research that measures business cycles and officially decides when there are economic "turning points" is:
a. a division of the Department of Commerce of the U.S. Government. b. an association of academic and professional economic forecasters. c. a unit within the U.S. Federal Reserve. d. a private nonprofit organization.
ch8. 31. 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
Ch. 11 22. An analyst employed by a pension fund to search for stocks for the fund to invest in would be referred to as:
a. a sell-side analyst. b. a buy-side analyst. c. an institutional analyst. d. a money manager.
Ch. 13 30. Which of the following types of yield curves is typically considered to be stimulative to the economy?
a. a steep, upward-sloping yield curve b. a flat yield curve c. an inverted yield curve d. a skewed yield curve
Ch. 11 19. An index fund that uses futures to hold the S&P 500 Index and invests the remainder in bonds would be an example of:
a. a value index fund. b. a derivatives index fund. c. an enhanced index fund. d. an active index fund.
Ch. 13 28. #2 Many market participants believe that when the dividend yield on the Standard and Poor's 500 is ____, the market is in for a downward correction.
a. above 6 percent b. below 6 percent c. above 3 percent d. below 3 percent
Ch. 12 32. Value Line's 1 to 5 stock ranking system of timeliness refers to:
a. absolute return potential over a 10-year period b. probability of outperforming the market over a 3 to 5 year period c. probable total return including dividend yield d. probable relative price performance within the next 12 months
Ch. 10 21. A major difference between the dividend discount model (DDM) and the free cash flow to equity model (FCFE) is that the FCFE:
a. accounts for potential capital gains and the DDM does not. b. measures what a firm could pay out in dividends and the DDM measures what is actually paid. c. measures both dividend growth and stability and the DDM only measures the dividend growth. d. bases its calculations on future value techniques while the DDM uses present value calculations.
Ch. 11 11. The passive investment strategy does not try to find undervalued stocks nor time the market. Instead, it is concerned with:
a. achieving returns available in various market sectors at minimum risk. b. achieving maximum returns available in various market sectors. c. achieving minimum risk in various market sectors. d. achieving returns available in various market sectors at minimum cost.
Ch. 11 26. Market timers attempt to earn excess returns by:
a. adjusting the ratio of aggressive equity securities to defensive equity securities. b. shifting the mix of short-term securities to long-term securities. c. varying the percentage of portfolio assets in equity securities. d. adjusting the ratio of primary market securities to capital market securities.
Ch. 11 35. If stock prices reflect their approximate fair value after transactions costs are taken into account, this is known as:
a. after-cost efficiency. b. economic efficiency. c. a market in equilibrium. d. an efficient market.
Ch. 11 4. Which of the following is TRUE regarding fluctuations in both individual stock prices and portfolios of stocks?
a. aggregate market movements are the largest single factor explaining these fluctuations b. beta is the largest single factor explaining these fluctuations c. standard deviation of returns is the largest single factor explaining these fluctuations d. financial risk is the largest single factor explaining these fluctuations
ch8. 10. Portfolios lying on the upper right portion of the efficient frontier are likely to be chosen by
a. aggressive investors b. conservative investors c. risk-averse investors d. defensive investors
Ch. 14 14. The U.S. is moving from an ---------- society to an ----------- society.
a. agricultural; industrial b. agricultural; information c. industrial; information d. industrial; international
Ch9. 11 The SML can be used to analyze the relationship between risk and required return for
a. all assets. b. inefficient portfolios. c. only efficient portfolios. d. only individual securities.
Ch. 12 2. An efficient market is defined as one in which:
a. all participants have the same opportunity to make the same returns. b. all participants have the same legal rights and transactions costs. c. securities prices quickly and fully reflect all available information. d. securities prices are completely in line with the intrinsic value.
Ch9. 23. If markets are truly efficient and in equilibrium
a. all securities would lie on the SML. b. any security that plots below the SML would be considered undervalued. c. any security that lies above the SML would be considered overvalued. d. no security would lie on the SML..
ch8. 29. Based on recent history, an investor would probably have a lower risk level with a portfolio consisting of:
a. all stocks b. all bonds c. some stocks and some bonds d. Impossible to tell
ch8. 13. Indifference curves:
a. always curve to the left b. have a positive slope c. cannot intersect d. are convex
Ch. 11 28. All of the following represent requirements for conducting effective sector rotation, EXCEPT
a. an accurate assessment of current economic conditions. b. a knowledge and understanding of the phases of the business cycle. c. an understanding of the political environment. d. expertise in technical analysis.
Ch. 11 12. If security markets are totally efficient, the best common stock strategy to take is:
a. an asset allocation approach. b. the modern portfolio theory. c. an active strategy. d. a passive strategy.
ch8. 2. Under the Markowitz model, investors:
a. are assumed to be risk-seekers b. are not allowed to use leverage c. are assumed to be institutional investors d. are always better off if they select portfolios consisting of multiple securitie
Ch. 11 21. The central focus of a security analyst's job is to:
a. ascertain the accuracy of financial statements of selected companies. b. find growth stocks. c. forecast a specific company's return. d. determine the market demand for a specific company's stock.
Ch. 14 11. The basic competitive factors facing industries include all of the following except:
a. bargaining power of suppliers b. threat of government regulation c. rivalry between existing competitors d. threat of substitute products
Ch. 11 8. Individual investors consider the investment decision:
a. based on market and economic conditions as consisting of asset allocation. b. based on market and economic conditions as consisting of asset allocation and security selection. c. based on objectives, constraints, and preferences, as consisting of asset allocation. d. based on objectives, constraints, and preferences, as consisting of asset allocation and security selection.
Ch9. 7. When markets are in equilibrium, the CML will be upward sloping
a. because it shows the optimum combination of risky securities. b. because the price of risk must always be positive. c. because it contains all securities weighted by their market values. d. because the CML indicates the required return for each portfolio risk level.
Ch. 10 25. Generally speaking, if interest rates fall and other factors remain constant, the P/E ratio of most companies company will:
a. become negative. b. increase. c. decrease. d. become more volatile.
Ch9. 12. 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)
Ch. 14 25. Three industry analysis approaches are:
a. business cycle analysis, qualitative analysis of important factors affecting industries, sector rotation. b. business cycle analysis, quantitative analysis of important factors affecting industries, market timing. c. business cycle analysis, technical analysis of important factors affecting industries, fundamental sector analysis. d. business cycle analysis, fundamental analysis of important factors affecting industries, technical sector analysis.
Ch. 13 25. The relationship between the stock market and the business cycle is generally considered reliable, but the stock market tends to give false signals about:
a. business cycle peaks (booms). b. business cycle troughs (recessions). c. business cycle inflection points between peaks and troughs, and between troughs and peaks (i.e., when the rates of decline in growth change from increasing to decreasing rates, and vice versa). d. ex post stock market returns.
Ch. 13 10. Which of the following is not a component of GDP?
a. business investment spending. b. government "investment" (really spending). c. net exports. d. financial transactions.
ch8. 7. The optimal portfolio for a risk-averse investor:
a. cannot be determined b. occurs at the point of tangency between the highest indifference curve and the highest expected return c. occurs at the point of tangency between the highest indifference curve and the efficient set of portfolios d. occurs at the point of tangency between the highest expected return and lowest risk efficient portfolios
Ch. 14 7. If an industry is ranked number one, based on price performance of the S&P Industry Stock Indexes, an investor
a. cannot necessarily expect that same industry to be ranked number one again next year. b. can usually depend on an industry to maintain its top ranking for five years or more. c. can expect that industry to do well over the next 10 to 20 years. d. can expect that industry to drop out of the top ten within five years.
Ch. 11 13. Passive common stock strategies attempt to minimize:
a. capital losses. b. transactions costs, including time spent managing the portfolio. c. market risk. d. company and industry risk.
Ch. 14 6. Industry analysis is important because:
a. companies can only do as well as their industry. b. industries often have an inverse relationship to the market. c. industries perform very differently over time. d. companies in declining industries lose money.
Ch. 14 1. The second step in the fundamental analysis of common stock, after the economy, is:
a. company b. economy c. industry d. business cycle
Ch9. 31. The arbitrage pricing theory (APT)
a. considers only one factor and is a narrower model than the CAPM. b. considers more factors than the CAPM and is a broader model. c. is useful only for well-diversified portfolios of common stock. d. is Easy to practice because the factors are readily observable.
Ch. 12 23. Studies cited in the text show technical trading rules based on price and volume data lead to investment timing decisions that
a. consistently outperform the buy-and-hold strategy. b. minimize brokerage costs. c. do not provide excess returns after all brokerage costs are deducted. d. do provide excess returns to most investors who follow the rules faithfully.
Ch. 13 15. When speculation pushes asset prices to unsustainable highs, this is known as a:
a. crash. b. contraction. c. recession. d. bubble.
ch8. 21. The single-index model implies stocks covary only because of their common:
a. currency b. relationship to each other c. relationship to the market d. desire to make a profit
Ch. 14 22. Which of the following industry categories is said to be "bought to be sold?"
a. cyclical b. defensive c. growth d. countercyclical
Ch. 11 9. If investors in the market become more pessimistic, it is expected that the required return will ----------.
a. decrease. b. increase. c. stay the same. d. there is not enough information to answer the question.
Ch. 10 4. All of the following are interchangeable terms except for:
a. discount rate b. coupon rate c. required rate of return d. capitalization rate
ch8. 30. Systematic risk is also called:
a. diversifiable risk b. market risk c. random risk d. company-specific risk
Ch. 11 6. The -------------- provides investors with a method of calculating a required return for a stock.
a. dividend discount model b. risk-free rate c. Fisher model d. Capital Asset Pricing Model
Ch. 13 13. Which of the following is considered to a leading indicator of a country's economy?
a. duration of unemployment b. stock prices c. money supply d. interest rate spread
Ch. 10 11. The constant growth rate model of the DDM implies that:
a. earnings are not relevant to stock prices. b. the payout ratio remains fixed. c. the stock price grows at the same rate as dividends. d. the growth rate in dividends equates to zero (i.e., dividends remain a "constant" dollar amount over time).
Ch. 14 17. The most important point of Michael Porter's analysis is that industry profitability is a function of
a. economy. b. interest-rate level. c. industry structure. d. industry beta.
Ch. 11 24. The so-called "global settlement" negotiated by the SEC, NYSE and NASD with a number of brokerage firms was intended to:
a. ensure more disclosure of relevant information to investors. b. separate investment banking from analyst research. c. stop the practice of buy, sell or hold recommendations in analysts' reports. d. all of the above
Ch. 12 35. The paradox of efficient markets is that
a. even though markets are efficient overall, there are pockets of inefficiency. b. news about anomalies makes the market less efficient. c. investors attempting to uncover and use information about security prices help make the market more efficient (i.e., an "efficient amount of inefficiency") d. investors make the market less efficient.
ch8. 15. Different investors will estimate the inputs to the Markowitz model differently because:
a. every investor has his/her own risk/return preferences b. every investor has access to different information about securities c. there is an inherent uncertainty in security analysis d. there is a random selection process used by individual investors
Ch. 11 5. The required rate of return for a common stock is defined as the:
a. expected return given an assumed set of probabilities and expected cash flows on the stock. b. maximum expected return based on estimates of expected cashflows from the stock. c. minimum expected return necessary to induce an investor to purchase the stock. expected return after evaluation of the risk on the stock has been taken.
ch8. 1. According to Markowitz, rational investors will seek efficient portfolios because these portfolios are optimal based on:
a. expected return. b. risk. c. expected return and risk. d. transactions costs.
Ch9. 17. Securities with betas greater than l should have:
a. expected returns higher than the market. b. required returns higher than the market return. c. required returns lower than the market return. d. no systematic risk.
Ch9. 33. Positive theory refers to a theory that
a. explains how economic participants should act b. describes how economic participants act c. is optimistic d. has been shown to have high explanatory power as a result of empirical testing
Ch. 13 3. Gross Domestic Product (GDP) is a basic measure of the economy, and is defined as the market value of what items produced by an economy for some time period (typically a year)?
a. final goods. b. final goods and services. c. final goods, services, and labor. d. final goods, services, labor, and capital.
Ch. 13 2. Multinational companies often follow the U.S. lead in restructuring processes and adopting new technologies. As a consequence,
a. foreign equities markets are driven by earnings growth and political considerations, like U.S. equities markets. b. foreign equities markets are driven by earnings growth and political considerations, unlike U.S. equities markets. c. foreign equities markets are driven by earnings growth and interest rate changes, like U.S. equities markets. d. foreign equities markets are driven by earnings growth and interest rate changes, unlike U.S. equities markets.
Ch. 12 36. 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 known as:
a. fundamental analysis. b. technical analysis. c. random-walk theory. d. data mining.
Ch. 10 3. Discounted cash flow techniques used in valuing common stock are based on:
a. future value analysis. b. present value analysis. c. the CAPM. d. the APT.
Ch. 11 34. What is usually considered the biggest risk of market timing?
a. getting out of the market too soon b. high transactions costs c. failing to adjust for short-term corrections d. not being in the market at critical times
Ch. 10 8. The zero-growth dividend model:
a. gives the highest value for a common stock. b. is the most accurate model to use. c. is equivalent to the valuation model for preferred stock. d. assumes the highest required return possible.
Ch. 13 11. In the U.S., the largest component of GDP is:
a. government spending. b. business investment. c. consumer spending. d. real estate.
Ch. 14 20. The food industry would be considered:
a. growth industry. b. defensive industry. c. cyclical industry. d. countercyclical industry.
Ch9. 1. The Capital Asset Pricing Model:
a. has serious flaws because of its complexity. b. measures relevant risk of a security and shows the relationship between risk and expected return. c. was developed by Markowitz in the 1930s. d. discounts almost all of the Markowitz portfolio theory.
Ch. 11 33. Commodity ETF's are mainly used as speculative plays by:
a. hedge fund traders. b. conservative investors. c. mutual fund managers. d. value investors.
Ch. 13 29. P/E ratios are generally depressed when interest rates are _____ and inflation is ________.
a. high; low b. low; high c. high; high d. low: low
Ch. 11 27. How can investors reasonably justify buy actively managed funds instead of index funds?
a. higher management fees usually suggests better performance b. the fund consistently outperformed the market, net of fees, and is expected to continue to do so c. the fund outperformed the S&P 500 by 4% last year d. the portfolio manager is new and considered a star analyst
Ch. 10 7. The constant growth dividend model uses the:
a. historical growth rate in dividends. b. historical growth rate in earnings. c. estimated growth rate in dividends. d. estimated growth rate in earnings.
Ch9. 15. Under the separation theorem, all investors should:
a. hold the same portfolio of risky assets and therefore have the same risk/return combination. b. have different optimal portfolios. c. have the same portfolio of risky assets and achieve their own risk-return combination through borrowing and lending. d. hold the same portfolio of risky assets and the same expected return but at different levels of risk
Ch. 12 9. Weak form market efficiency
a. implies that the expected return on any security is zero. b. incorporates semi-strong form efficiency. c. involves price and volume information. d. is compatible with technical analysis.
ch8. 14. The benefits of international diversification have ________since 1995.
a. increased b. decreased c. disappeared d. become more volatile
Ch. 12 11. The weak form of the EMH is supported if successive price changes over time are
a. independent of each other. b. negative. c. positive. d. lagged.
Ch. 11 10. The most important decision to make when building a diversified stock portfolio is:
a. individual security analysis. b. asset allocation. c. minimization of market risk. d. maximization of expected return.
Ch. 12 24. According to the behavioral finance, markets are always
a. informationally efficient. b. informationally inefficient. c. weak-form efficient. d. semi-strong form efficient.
Ch. 13 31. Warren Buffett thinks long-term movements in stock prices are caused by which of the following two economic variables?
a. interest rates and realized corporate profits. b. interest rates and expected corporate profits c. interest rates, inflation, and unemployment d. interest rates, inflation, and growth in GDP
Ch. 11 16. Which of the following is NOT considered a passive equity investment:
a. investing in a sector ETF. b. investing in a S&P 500 index mutual fund. c. investing in a multi-strategy hedge fund. d. investing in a Russell 2000 index mutual fund.
Ch. 12 33. The disposition effect relates to the fact that:
a. investors tend to overconfident regarding potential stock prices. b. investors often experience regrets about trading decisions. c. investors are more likely to sell winners than losers. d. investors tend to dispose of stocks at the end of the year.
Ch. 13 23. Current stock prices reflect:
a. investors' confidence in the current economy. b. investors' confidence in the current administration. c. investors' expectations of the future. d. investors' attitudes about the past market.
Ch9. 14. Select the correct statement regarding the market portfolio. It:
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.
Ch. 13 29. #2 The Fed model, which uses the E/P ratio in its calculations, :
a. is relatively complex. b. uses the yield on the 3-month Treasury bill as the risk-free rate. c. assumes investors can easily switch between stocks and bonds. d. all of the above
Ch. 13 16. Stock investors pay attention to the bond market because:
a. it is more stable than the stock market. b. it can provide daily signals whereas stock market data tends to trend weekly, monthly or quarterly. c. it is a more accurate measure of overall economic activity. d. it is privy to more government information, especially from the Federal Reserve.
Ch9. 13. Under the CMT, the relevant risk to consider with any security is:
a. its correlation with other securities in the portfolio. b. its covariance with the market portfolio. c. its deviation from the portfolio required rate of return. d. its variance from the risk-free rate of return.
Ch. 13 12. Indexes of general economic activity include all but:
a. lagging b. emerging c. leading d. coincident
Ch. 12 30. The January effect concerns:
a. large cap stocks. b. mid-cap stocks. c. small cap stocks. d. foreign stocks.
ch8. 9. According to Markowitz, an efficient portfolio is one that has the
a. largest expected return for the smallest level of risk b. largest expected return and zero risk c. largest expected return for a given level of risk d. smallest level of risk
Ch9. 32. The APT is based on the:
a. law of averages. b. law of attraction. c. law of accelerating return. d. law of one price.
Ch. 13 26. During a typical contraction, stock prices decline 25 percent from peak. During recent recessions, however, the range of decline has been:
a. less than 20 percent. b. between 20 and 30 percent. c. between 30 and 40 percent. d. greater than 40 percent.
Ch. 13 20. In the early stages of a business cycle, yield tends to be:
a. low and upward sloping. b. flat. c. high and downward sloping. d. inverted.
Ch. 12 27. Based on the research related to market anomalies, investors should prefer
a. low standardized unexpected earnings (SUE) and high P/E ratios. b. low SUE, low P/E stocks. c. high SUE, low P/E stocks. d. high SUE, high P/E stocks.
Ch. 10 33. Several analysts and empiricists recommend investing in stocks with what kind of price to book value ratios?
a. low. b. equal to one. c. high. d. equal to zero.
Ch. 11 18. A significant advantage of index funds is their:
a. lower market price than other types of funds. b. sector rotation. c. tax efficiency. d. minimization of risk.
ch8. 12. The optimal portfolio is the efficient portfolio with the
a. lowest risk b. highest risk c. highest utility d. least investment
Ch. 14 24. Which of the following sectors was adversely affected by the recent accounting changes requiring the expensing of stock options?
a. manufacturing b. technology c. energy d. utilities
ch8. 23. Under the Multi-Index Model, the industry relationship to stock prices would be assessed by the:
a. market factor b. nonmarket factor c. beta d. unique part
Ch. 12 25. Evidence concerning the "overreaction hypothesis" indicates that
a. most overreactions occur within the first two days of an economic event. b. investors are consistently risk-averse value maximizers. c. the market is even more efficient than the weak-form EMH proposes. d. investors sometimes act rationally.
Ch. 10 30. Value stocks, such as those considered the Dogs of the Dow, will generally have:
a. no dividend payments b. a low P/E ratio c. a low payout ratio d. a high required return
Ch. 12 20. 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 earn
a. normal return because the stock will be fairly priced when purchased. b. extraordinary return because the new information will not affect the price until later. c. extraordinary loss because insiders possess non-public information. d. zero return because the next price is expected to be the same as the last price.
Ch. 12 5. If a market is inefficient, as new information is received about a security:
a. nothing will happen. b. the stock price will fall at first and then later rise. c. there will be a lag in the adjustment of the stock price d. there will be negative demand for the stock.
Ch. 11 30. Sector rotation is
a. one form of passive investing. b. an active strategy similar to stock selection. c. an attempt to earn excess returns by varying the percentage of assets in the portfolio. d. not dependent on an accurate assessment of current economic conditions.
Ch. 10 29. Economic value added is the difference between:
a. operating profits and cost of capital. b. operating profits and cost of equity. c. net profits and cost of capital. d. net profits and cost of equity.
ch8. 11. A portfolio which lies below the efficient frontier is described as
a. optimal b. unattainable c. dominant d. dominated
Ch. 10 35. The price/sales ratio indicates:
a. the amount of risk in the firm's operations. b. what the market is willing to pay for a firm's revenues. c. the price advantage a company has for its brand names. d. what the analysts see as the breakup value of the firm.
Ch. 10 36. A relatively new valuation technique that emphasizes the difference between a firm's operating profits and its cost of capital is called:
a. the discounted dividend model. b. the capital asset pricing model. c. economic value added model. d. the market capitalization model.
Ch. 11 14. Investors following a passive strategy use which of the following as the best estimate of a security's value?
a. the dividend discount model. b. Fisher model. c. current market price. d. current earnings per share.
Ch. 13 18. An inverted yield curve generally indicates:
a. the economy is accelerating. b. economic activity is slowing down. c. a pending recession. d. rising inflation.
ch8. 5. An indifference curve shows:
a. the one most desirable portfolio for a particular investor b. all combinations of portfolios that are equally desirable to a particular investor c. all combinations of portfolios that are equally desirable to all investors d. the one most desirable portfolio for all investors
Ch. 10 31. Book value is:
a. the same as market value. b. a more accurate valuation technique than the dividend models. c. the accounting value of the firm as reflected in the financial statements. d. the same as liquidation value.
Ch9. 24. If a certain stock has a beta greater than 1.0, it means that
a. the stock's return is more volatile than that of the market portfolio. b. an investor can eliminate the risk by combining it with another stock that has a negative beta. c. an investor will earn a higher return on his stock than that on the market portfolio. d. the stock is less risky than the market portfolio.
Ch. 10 10. Under the multiple growth model, at least ------ different growth rates are used.
a. two b. three c. four d. five
Ch. 11 31. Historically, sell-side equity research has typically been _________to the target company?
a. very unfavorable b. unfavorable c. favorable d. neutral
Ch. 12 21. 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
a. weak form EMH is not valid. b. semi-strong form of EMH is not valid. c. market prices are random. d. the lady was lucky.
Ch. 12 10. The highest level of market efficiency is
a. weak form efficiency. b. semi-strong form efficiency. c. random walk efficiency. d. strong form efficiency.
Ch. 12 14. The random walk hypothesis is most related to the:
a. weak-form EMH b. semistrong-form EMH c. semiweak-form EMH d. strong-form EMH
Ch. 11 23. The Merrill Lynch case in 2002 confirmed that many analysts:
a. were paid too much. b. were unable to accurately pinpoint earnings. c. gave buy recommendations to win investment banking business. d. shared private information about companies with investors.
ch8. 4. When the Markowitz model assumes that most investors are considered to be "risk averse", this really means that they:
a. will not take a "fair gamble" b. will take a "fair gamble" c. will take a "fair gamble" fifty percent of the time d. will never assume investment risk
ch8. 26. Because of increasing correlation between U.S. markets and foreign markets, most professional investors now recommend:
a. zero exposure to foreign markets for the foreseeable future b. replacing foreign stock exposure with U.S. Treasury bonds c. maintaining some reasonable exposure to foreign markets d. replacing foreign stock exposure with sovereign debt from investment grade countries.
Ch. 10 9. 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:
a. zero-growth model. b. constant growth model. c. expansion growth model. d. multiple growth model.