FI 302 Test 3
The largest financial markets in the U.S.A. include the bond market and the stock market. One of these markets, however, is significantly larger than the other market. Decide whether this statement is true or false: On an average day the dollar trading volume of all stocks traded in the U.S.A. is significantly greater than the dollar trading volume of all bonds in the U.S.A. T/F
False
The dividend growth valuation model equates intrinsic value to the discounted sum of the perpetual and smoothly growing dividend stream. When the dividend growth rate (g) exceeds the discount rate (r) the formula gives an intrinsic value that is a negative number. Determine whether the following interpretation of the preceding fact is TRUE or FALSE: the stock has an infinite intrinsic value. T/F
True
The largest financial markets in the U.S.A. include the bond market and the stock market. One of these markets, however, is significantly larger than the other market. Decide whether this statement is true or false: On an average day the dollar trading volume of all bonds traded in the U.S.A. is significantly greater than the dollar trading volume of all stocks in the U.S.A. T/F
True: bonds>stocks
Which statement is the best description for a bond investment of the relation between the promised yield-to-maturity and the actual ex post rate of return? a. The actual ex post ROR equals the promised yield-to-maturity when you own the bond until maturity and receive all expected cash flows. b. The actual ex post ROR exceeds the promised yield-to-maturity when you sell a bond before it matures and the YTM at time of sale is the same as when it was purchased. c. The actual ex post ROR exceeds the promised yield-to-maturity when you sell a bond before it matures and the YTM at time of sale exceeds the YTM when it was purchased. d. Two choices, A and B, are correct e. None of the A-B-C choices are correct
a. The actual ex post ROR equals the promised yield-to-maturity when you own the bond until maturity and receive all expected cash flows.
The dividend growth valuation model equates a stock's intrinsic value to the discounted sum of the perpetual and smoothly growing dividend stream. The relation between the dividend growth rate (g) and the discount rate (r) is very important. Which statement accurately describes that relation? a. When g equals zero percent then the stock's intrinsic value computes as the present value of a perpetuity, div/r. b. When g exceeds r then the stock's intrinsic value is negative, meaning the stock is worthless. c. The stock's intrinsic value is an increasing function of the discount rate r. d. Two choices, B and C, are correct e. The three A-B-C choices are all correct
a. When g equals zero percent then the stock's intrinsic value computes as the present value of a perpetuity, div/r.
According to the constant growth dividend valuation model, the total rate of return partitions into the expected dividend yield and the capital gains yield. Which statement is the most accurate description of the partition? a. the dividend yield is more predictable and less risky than the capital gains yield b. usually the dividend component is an accrued cash flow whereas the capital gains yield is a realized cash flow c. the long-run average dividend yield is bigger than the capital gains yield d. the dividends are usually tax exempt whereas capital gains are immediately taxable e. the capital gains yield minus the expected dividend yield equals the total rate of return
a. the dividend yield is more predictable and less risky than the capital gains yield
The most common statistic for measuring risk is the standard deviation of expected returns. Which statement best describes the standard deviation as a risk measure? a. the standard deviation gets larger as the likelihood of extreme outcomes increases b. the standard deviation gives less weight to upside extreme returns because these are good outcomes, whereas downside extreme returns are bad outcomes and so receive more weight c. when expected returns have a normal distribution then the 95% confidence interval for next period's return approximately equals the mean return plus or minus one standard deviation d. Two choices, A and C, are correct e. The three A-B-C choices are all correct
a. the standard deviation gets larger as the likelihood of extreme outcomes increases
Choose the most accurate statement about the NASDAQ stock exchange. a. The NASD (National Association of Securities Dealers) created NASDAQ and securities dealers must join either the NYSE or NASD b. NASDAQ is a complex telecommunications network composed of many market makers on many stocks c. NASDAQ lists stocks for between 15,000 and 20,000 companies d. Two choices, A and B, are correct e. The three A-B-C choices are all correct
b. NASDAQ is a complex telecommunications network composed of many market makers on many stocks
The most common statistic for measuring risk is the standard deviation of expected returns. Which statement best describes the standard deviation as a risk measure? a. the standard deviation gets larger as the likelihood of extreme outcomes decreases b. the standard deviation is equally sensitive to upside as well as downside extreme returns c. when expected returns have a normal distribution then the 95% confidence interval for next period's return approximately equals the mean return plus or minus one standard deviation d. Two choices, A and B, are correct e. None of the A-B-C choices are correct
b. the standard deviation is equally sensitive to upside as well as downside extreme returns
The minimum risk portfolio for two securities, call them X and Y, is easily found given the component security risks (say sigma(X) and sigma(Y) ) and the correlation between returns (rho). Which statement accurately describes the minimum risk portfolio? a. The allocation in X decreases as the risk of Y increases. b. The covariance equals rho times sigma(X) times sigma(Y) and always the sign of covariance is opposite the sign of rho. c. When the correlation equals zero then the allocation to X equals the ratio of Y's variance to the sum of variances. d. Two choices, A and C, are correct e. None of the A-B-C choices are correct
c. When the correlation equals zero then the allocation to X equals the ratio of Y's variance to the sum of variances
Choose the most accurate statement about the NASDAQ stock exchange. a. The NASD (National Association of Securities Dealers) created NASDAQ and securities dealers must join either the NYSE or NASD b. NASDAQ is a stock exchange in Washington DC that markets stocks c. NASDAQ lists stocks for between 3,000 and 5,500 companies d. Two choices, B and C, are correct e. The three A-B-C choices are all correct
c. NASDAQ lists stocks for between 3,000 and 5,500 companies
You form a portfolio by combining shares of stocks for two different companies. The companies have different expected returns, and different risks. Which statement is true for all of the possible portfolios that contain shares in both companies? (NOTE: Choices below might be incorrect because they always are false, whereas others might be incorrect because they are sometimes true and sometimes false. Only the correct choice is always true.)? a. The return for the portfolio is less than the return of the lowest return stock. b. The risk for the portfolio is less than the risk of the least risky stock. c. The return for the portfolio is less than the return of the highest return stock. d. The risk for the portfolio lies between the risks of the component stocks. e. The risk of the portfolio is greater than the risk of the least risky stock.
c. The return for the portfolio is less than the return of the highest return stock.
The minimum risk portfolio for two securities, call them X and Y, is easily found given the component security risks (say sigma(X) and sigma(Y) ) and the correlation between returns (rho). Which statement accurately describes the minimum risk portfolio? a. The allocation in X increases as the risk of Y decreases. b. The covariance equals rho times sigma(X) times sigma(Y) and always the sign of covariance is opposite the sign of rho. c. When the securities have equal risk then the allocations to X and Y both equal fifty percent. d. Two choices, A and C, are correct e. None of the A-B-C choices are correct
c. When the securities have equal risk then the allocations to X and Y both equal fifty percent.
Which statement about bond prices is most accurate? a. For a discount bond the coupon rate exceeds the yield to maturity b. For a premium bond the yield-to-maturity exeeds the coupon rate c. With an interest rate decline the price rises more for long-term bonds than for short-term bonds d. When a bond is sold at an interest rate less than the initial yield to maturity then the actual rate of return is less than the promised yield e. With an interest rate increase the price rises more for long-term bonds than for short-term bonds
c. With an interest rate decline the price rises more for long-term bonds than for short-term bonds b. With an interest rate increase the price falls more for long-term bonds than for short-term bonds e. For a premium bond the yield-to-maturity is less than the coupon rate c. When a bond is sold at an interest rate less than the initial yield to maturity then the actual rate of return exceeds the promised yield
The most common statistic for measuring risk is the standard deviation of expected returns. Which statement best describes the standard deviation as a risk measure? a. the standard deviation gets larger as the likelihood of extreme outcomes increases b. the standard deviation gives less weight to upside extreme returns because these are good outcomes, whereas downside extreme returns are bad outcomes and so receive more weight c. when expected returns have a normal distribution then the 95% confidence interval for next period's return approximately equals the mean return plus or minus two standard deviations d. Two choices, A and C, are correct e. The three A-B-C choices are all correct
d. Two choices, A and C, are correct
Which statement about the NASDAQ market is most accurate? a. NASDAQ is a market comprised of many market makers for between 3,000 and 5,500 stocks b. All brokers and companies in the U.S.A. working with securities and the public must trade securities on NASDAQ c. NASDAQ is a market that lacks a physical exchange floor but has a complex telecommunications network d. Two choices, A and C, are correct e. None of the A-B-C choices are correct
d. Two choices, A and C, are correct
The dividend growth valuation model equates a stock's intrinsic value to the discounted sum of the perpetual and smoothly growing dividend stream. The relation between the dividend growth rate (g) and the discount rate (r) is very important. Which statement accurately describes that relation? a. When g equals zero percent then the stock's intrinsic value is greater than div/r. b. When g exceeds r then the stock's intrinsic value tends to infinity, meaning the stock is priceless. c. The stock's intrinsic value is an increasing function of the dividend growth rate g. d. Two choices, B and C, are correct e. None of the A-B-C choices are correct
d. Two choices, B and C, are correct
Which statement about the NASDAQ market is most accurate? a. NASDAQ is an auction market with open outcry trading b. All brokers and companies in the U.S.A. working with securities and the public are members of NASD c. NASDAQ is a market that lacks a physical exchange floor but has a complex telecommunications network d. Two choices, B and C, are correct e. None of the A-B-C choices are correct
d. Two choices, B and C, are correct
Which statement is the best description for a bond investment of the relation between the promised yield-to-maturity and the actual ex post rate of return? a. The actual ex post ROR is less than the promised yield-to-maturity when you own the bond until maturity and receive all expected cash flows. b. The actual ex post ROR equals the promised yield-to-maturity when you sell a bond before it matures and the YTM at time of sale is the same as when it was purchased. c. The actual ex post ROR exceeds the promised yield-to-maturity when you sell a bond before it matures and the YTM at time of sale is less than the YTM when it was purchased. d. Two choices, B and C, are correct e. The three A-B-C choices are all correct
d. Two choices, B and C, are correct
Which characteristic best describes the Treasury yield curve? a. coordinates of the yield curve are interest rate on horizontal axis and term-to-maturity on vertical axis b. the curve normally begins flat and steepens downward toward the right c. the curve depicts the spread between corporate bond yields and Treasury bonds d. the curve normally begins with a steep upward slope that flattens toward the right e. coordinates of the yield curve are yield-to-maturity on horizontal axis and term-to-maturity on vertical axis
d. the curve normally begins with a steep upward slope that flattens toward the right
Choose the most accurate statement about the NASDAQ stock exchange. a. The NASD (National Association of Securities Dealers) created NASDAQ and securities dealers must join either the NYSE or NASD b. NASDAQ is a stock exchange in Washington DC that markets stocks c. NASDAQ lists stocks for between 15,000 and 20,000 companies d. Two choices, B and C, are correct e. None of the A-B-C choices are correct
e. None of the A-B-C choices are correct
The minimum risk portfolio for two securities, call them X and Y, is easily found given the component security risks (say sigma(X) and sigma(Y) ) and the correlation between returns (rho). Which statement accurately describes the minimum risk portfolio? a. The allocation in X decreases as the risk of Y increases. b. The covariance equals rho times sigma(X) times sigma(Y) and always the sign of covariance is opposite the sign of rho. c. When the correlation equals zero then the allocations to X and Y both equal fifty percent. d. Two choices, A and C, are correct e. None of the A-B-C choices are correct
e. None of the A-B-C choices are correct
The most common statistic for measuring risk is the standard deviation of expected returns. Which statement best describes the standard deviation as a risk measure? a. the standard deviation gets larger as the likelihood of extreme outcomes decreases b. the standard deviation gives less weight to upside extreme returns because these are good outcomes, whereas downside extreme returns are bad outcomes and so receive more weight c. when expected returns have a normal distribution then the 95% confidence interval for next period's return approximately equals the mean return plus or minus one standard deviation d. Two choices, B and C, are correct e. None of the A-B-C choices are correct
e. None of the A-B-C choices are correct
Choose the most accurate statement about the NASDAQ stock exchange. a. The NASD (National Association of Securities Dealers) created NASDAQ and every securities dealer in the USA that works with the public must belong to NASD b. NASDAQ is a complex telecommunications network composed of many market makers on many stocks c. NASDAQ lists stocks for between 3,000 and 5,500 companies d. Two choices, A and C, are correct e. The three A-B-C choices are all correct
e. The three A-B-C choices are all correct
The dividend growth valuation model equates a stock's intrinsic value to the discounted sum of the perpetual and smoothly growing dividend stream. The relation between the dividend growth rate (g) and the discount rate (r) is very important. Which statement accurately describes that relation? a. When g equals zero percent then the stock's intrinsic value computes as the present value of a perpetuity, div/r. b. When g exceeds r then the stock's intrinsic value tends to infinity, meaning the stock is priceless. c. The stock's intrinsic value is a decreasing function of the discount rate r. d. Two choices, B and C, are correct e. The three A-B-C choices are all correct
e. The three A-B-C choices are all correct
The minimum risk portfolio for two securities, call them X and Y, is easily found given the component security risks (say sigma(X) and sigma(Y) ) and the correlation between returns (rho). Which statement accurately describes the minimum risk portfolio? a. The allocation in X increases as the risk of Y increases. b. The covariance equals the product of rho times sigma(X) times sigma(Y) and always the signs of covariance and rho are identical. c. When the correlation equals zero then the allocation to X equals the ratio of Y's variance to the sum of variances. d. Two choices, A and C, are correct e. The three A-B-C choices are all correct
e. The three A-B-C choices are all correct
According to the constant growth dividend valuation model, the total rate of return partitions into the expected dividend yield and the capital gains yield. Which statement is the most accurate description of the partition? a. the capital gains yield minus the expected dividend yield equals the total rate of return b. usually the dividend component is an accrued cash flow whereas the capital gains yield is a realized cash flow c. the long-run average dividend yield is bigger than the capital gains yield d. the dividend yield is less predictable and riskier than the capital gains yield e. the dividends are usually taxable in the year received whereas capital gains are tax deferred
e. the dividends are usually taxable in the year received whereas capital gains are tax deferred
