Finance 3716 LSU Chapter 10, 11, & 12
A portfolio comprises Coke (beta of 1.4) and Wal-Mart (beta of 0.8). The amount invested in Coke is $20,000 and in Wal-Mart is $30,000. What is the beta of the portfolio? A) 1.04 B) 1.20 C) 1.35 D) 1.25
a
A portfolio comprises Coke (beta of 1.6) and Wal-Mart (beta of 0.6). The amount invested in Coke is $10,000 and in Wal-Mart is $20,000. What is the beta of the portfolio? A) 0.93 B) 0.84 C) 1.03 D) 0.98
a
A portfolio has three stocks --- 240 shares of Yahoo (YHOO), 150 Shares of General Motors (GM), and 40 shares of Standard and Poorʹs Index Fund (SPY). If the price of YHOO is $30, the price of GM is $30, and the price of SPY is $130, calculate the portfolio weight of YHOO and GM. A) 42.6%, 26.6% B) 23.4%, 49.3% C) 12.8%, 16.0% D) 40.5%, 28.0%
a
A portfolio of stocks can achieve diversification benefits if the stocks that comprise the portfolio are ________. A) not perfectly positively correlated B) perfectly correlated C) susceptible to common risks only D) both B and C
a
A stock market comprises 1500 shares of stock A and 3000 shares of stock B. The share prices for stocks A and B are $24 and $34 , respectively. What is the capitalization of the market portfolio? A) $138,000 B) $117,300 C) $110,400 D) $151,800
a
A stock market comprises 4600 shares of stock A and 2000 shares of stock B. Assume the share prices for stocks A and B are $25 and $35 , respectively. What is the capitalization of the market portfolio? A) $185,000 B) $157,250 C) $175,750 D) $203,500
a
A study of trading behavior of individual investors at a discount brokerage found that individual investors ________. A) trade very actively, despite the fact that their performance is actually worse because of trading costs B) trade very conservatively, despite the fact that their performance is actually worse because of trading costs C) trade very actively, partly because their performance is better than the professionalsʹ due to low trading costs D) trade very conservatively, partly because their performance is better than the professionalsʹ due to low trading costs
a
Advanced Chemical Industries is awaiting the verdict from a court case over whether it is liable for the clean-up of wastes on a disused factory site. If it is liable, this will result in a reduction of its free cash flow by $11 million per year for ten years. If it is not liable, there will be no effect. On the close of trading the day before the announcement of the verdict, Advanced Chemicals was trading at $20 per share. Most investors calculate that there is a 100% chance that Advanced Chemicals will have a verdict returned against them. One investor, Jo, has performed extensive research into the outcome of the trial and estimates that there is no chance Advanced Chemicals will have a verdict returned against them. Given that Advanced Chemicals has 40 million shares outstanding and an equity cost of capital of 6% with no debt, Joʹs estimate of the value of a share of Advanced Chemicals would be how much more than the market price? A) $2.02 B) $20.81 C) $21.01 D) $21.62
a
Amazon.com stock prices gave a realized return of 15%, 15%, -15%, and -15% over four successive quarters. What is the annual realized return for Amazon.com for the year? A) -4.45% B) -7.12% C) -5.12% D) 0%
a
Amazon.com stock prices gave a realized return of 5%, -5%, 11%, and -11% over four successive quarters. What is the annual realized return for Amazon.com for the year? A) -1.46% B) 2.91% C) 0.00% D) 1.46%
a
Banco Industries expect sales to grow at a rapid rate over the next 3 years, but settle to an industry growth rate of 5% in year 4. The spreadsheet above shows a simplified pro forma for Banco Industries. Banco industries has a weighted average cost of capital of 11%, $40 million in cash, $70 million in debt, and 18 million shares outstanding. If Banco Industries can reduce its operating expenses so that EBIT becomes 12% of sales, by how much will its stock price increase? A) $3.27 B) $3.92 C) $5.72 D) $9.80
a
Because investors can eliminate unsystematic risk "for free" by diversifying their portfolios, they ________. A) do not require a risk premium for bearing it B) require a risk premium for bearing it C) are indifferent about credit spread and risk premium D) do not require a credit spread
a
A portfolio has 40% of its value in IBM shares and the rest in Microsoft (MSFT). The volatility of IBM and MSFT are 40% and 30%, respectively, and the correlation between IBM and MSFT is -0.3. What is the standard deviation of the portfolio? A) 19.17 % B) 18.16 % C) 22.20% D) 20.18 %
d
A portfolio has 45% of its value in IBM shares and the rest in Microsoft (MSFT). The volatility of IBM and MSFT are 33% and 35%, respectively, and the correlation between IBM and MSFT is 0. What is the standard deviation of the portfolio? A) 19.45 % B) 27.96 % C) 34.04% D) 24.31 %
d
A portfolio has three stocks --- 110 shares of Yahoo (YHOO), 210 Shares of General Motors (GM), and 70 shares of Standard and Poorʹs Index Fund (SPY). If the price of YHOO is $20, the price of GM is $20, and the price of SPY is $130, calculate the portfolio weight of YHOO and GM. A) 10.6%, 13.5% B) 9.9%, 25.7% C) 13.5%, 24.4% D) 14.2%, 27.1%
d
Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 40% probability that the firm will have a 20% return and a 60% probability that the firm will have a -30% return. The standard deviation for the return on an individual firm is closest to ________. A) 24.49 % B) -10.00 % C) 12.25% D) 9.80%
a
Consider the following average annual returns: What is the excess return for Treasury bills? A) 0% B) -9.1% C) -3.2% D) -2.4%
a
Consider the following average annual returns: What is the excess return for corporate bonds? A) 2.6% B) 1.3% C) 5.2% D) 0%
a
Consider the following realized annual returns: The average annual return on the S&P 500 from 1996 to 2005 is closest to ________. A) 8.68% B) 4.34% C) 5.21% D) 9.55%
a
Consider the following returns: The covariance between Lowesʹ and Home Depotʹs returns is closest to ________. A) 0.10 B) 0.31 C) 0.12 D) 0.73
a
General Industries is expected to generate the above free cash flows over the next five years, after which free cash flows are expected to grow at a rate of 5% per year. If the weighted average cost of capital is 9% and General Industries has cash of $15 million, debt of $45 million, and 80 million shares outstanding, what is General Industriesʹ expected current share price? A) $7.78 B) $8.17 C) $9.34 D) $11.67
a
If the returns on a stock index can be characterized by a normal distribution with mean 12%, the probability that returns will be lower than 12% over the next period equals ________. A) 50% B) 25% C) 46% D) 33%
a
Independent risk is more closely related to ________. A) unsystematic risk B) systematic risk C) common risk D) diversification risk
a
Rational investors ________ fluctuations in the value of their investments. A) are averse to B) prefer C) are indifferent to D) are in favor of
a
Stocks with high returns are expected to have ________. A) high variability B) low variability C) no relation to variability D) inverse relationship with variability
a
Which of the following investments had the largest fluctuations overall return over the past eighty years? A) small stocks B) S&P 500 C) corporate bonds D) Treasury bills
a
Which of the following is NOT a diversifiable risk? A) the risk that oil prices rise, increasing production costs B) the risk that the CEO is killed in a plane crash C) the risk of a key employee being hired away by a competitor D) the risk of a product liability lawsuit
a
Which of the following statements is FALSE? A) On average, larger stocks have higher volatility than smaller stocks. B) Portfolios of large stocks are typically less volatile than individual large stocks. C) On average, smaller stocks have higher returns than larger stocks. D) On average, Treasury Bills have lower returns than corporate bonds.
a
Consider the following average annual returns: What is the excess return for the S&P 500? A) 11.5% B) 16.3% C) 0% D) 9.3%
d
Ford Motor Company had realized returns of 10%, 20%, -10%, and -10% over four quarters. What is the quarterly standard deviation of returns for Ford? A) 12.75 % B) 14.25 % C) 13.50% D) 15.00%
d
Gonzales Corporation generated free cash flow of $81 million this year. For the next two years, the companyʹs free cash flow is expected to grow at a rate of 9%. After that time, the companyʹs free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 11% and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Gonzales Corporationʹs expected free cash flow in year 2? A) $1429.79 million B) $86.61 million C) $1572.77 million D) $96.24 million
d
The amount of a stockʹs risk that is diversified away ________. A) is independent of the portfolio that you add it to B) depends on market risk premium C) depends on risk-free rate of interest D) depends on the portfolio that you add it to
d
The average annual return over the period 1926-2009 for small stocks is 21.2%, and the standard deviation of returns is 21.2%. Based on these numbers, what is a 95% confidence interval for 2010 returns? A) -10.6%, 31.8% B) 0%, 42.4% C) -21.2%, 42.4% D) -21.2%, 63.6%
d
The beta of the market portfolio is ________. A) 0 B) -1 C) 2 D) 1
d
Treasury bill returns are 4%, 3%, 2%, and 5% over four years. The standard deviation of returns of Treasury bills is ________. A) 1.55% B) 1.03% C) 0.90% D) 1.29%
d
You purchase a 30-year, zero-coupon bond for a price of $25. The bond will pay back $100 after 30 years and make no interim payments. The annual compounded return (geometric average return) on this investment is ________. A) 4.49% B) 5.68% C) 4.02% D) 4.73%
d
Your retirement portfolio comprises 200 shares of the S&P 500 fund (SPY) and 100 shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $134 and that of AGG is $110 . If you expect the return on SPY to be 10 % in the next year and the return on AGG to be 8%, what is the expected return for your retirement portfolio? A) 8.48% B) 154.10 % C) 9.89% D) 9.42%
d
A linear regression to estimate the relation between General Motorsʹ stock returns and the marketʹs return gives the best fitting line that represents the relation between the stock and the market. The slope of this line is our estimate of ________. A) alpha B) beta C) risk-free rate D) volatility
b
A linear regression was done to estimate the relation between Sprintʹs stock returns and the marketʹs return. The intercept of the line was found to be 0.23 and the slope was 1.47. Which of the following statements is true regarding Sprintʹs stock? A) Sprintʹs beta is 0.23. B) Sprintʹs beta is 1.47. C) The risk-free rate is 1.47%. D) The standard deviation of Sprintʹs excess returns is 23%.
b
Consider the following realized annual returns: The average annual return on IBM from 1996 to 2005 is closest to ________. A) 18.48% B) 16.07% C) 19.28% D) 28.93%
b
The average annual return over the period 1926-2009 for the S&P 500 is 12.8%, and the standard deviation of returns is 21.4%. Based on these numbers, what is a 67% confidence interval for 2010 returns? A) -1.3%, 20.5% B) -8.6%, 34.2% C) -25.8%, 54.7% D) -25.8%, 47.9%
b
Which of the following statements is FALSE? A) The geometric average return is a better description of the long-run historical performance of an investment. B) The geometric average return will always be above the arithmetic average return, and the difference grows with the volatility of the annual returns. C) The compounded geometric average return is most often used for comparative purposes. D) We should use the arithmetic average return when we are trying to estimate an investmentʹs expected return over a future horizon based on its past performance.
b
A portfolio comprises Coke (beta of 1.3) and Wal-Mart (beta of 0.7). The amount invested in Coke is $20,000 and in Wal-Mart is $20,000. What is the beta of the portfolio? A) 0.9 B) 0.95 C) 1.00 D) 1.10
c
Bear Stearnsʹ stock price closed at $98 , $103 , $58 , $29 , $4 over five successive weeks. The weekly standard deviation of the stock price calculated from this sample is ________. A) $30.07 B) $49.40 C) $42.96 D) $34.37
c
Consider the following returns: The volatility on Home Depotʹs returns is closest to ________. A) 35% B) 32% C) 42% D) 17%
c
Ford Motor Company had realized returns of 15%, 30%, -15%, and -30% over four quarters. What is the quarterly standard deviation of returns for Ford? A) 24.65 % B) 32.86 % C) 27.39% D) 30.12 %
c
Individual investorsʹ tendency to trade too much based on the mistaken belief that they can pick winners and losers better than investment professionals is known as ________. A) the disposition effect B) the investor attention hypothesis C) the investor overconfidence hypothesis D) the excessive trading costs hypothesis
c
McCoy paid a one-time special dividend of $3.20 on October 18, 2010. Suppose you bought McCoy stock for $47.00 on July 18, 2010, and sold it immediately after the dividend was paid for $62.93 . What was your capital gain yield from holding McCoy? A) 4.07% B) 6.11% C) 33.89% D) 40.70 %
c
Valuation models use the relationship between share value, future cash flows, and the cost of capital to estimate these quantities for a given firm. Realistically, for a publicly traded firm, what can we reliably use such models to determine? I. the firmʹs future cash flows II. the firmʹs cost of capital III. then firmʹs market price A) I only B) II only C) III only D) I and II
c
Which of the following is the best statement of the efficient markets hypothesis? A) Investors with information that a stock had a positive net present value (NPV) will buy it, while investors with information that a stock had a negative net present value (NPV) will sell it. B) Investorʹs decisions are dependent on complete current information of a firmʹs cash flows and accurate predictions of future cash flows. C) Competition between investors works to make the net present value (NPV) of all trading opportunities zero. D) A shareʹs price is the aggregate of the information of many investors.
c
Which of the following statements is FALSE? A) Because all investors should hold risky securities in the same proportions as the efficient portfolio, their combined portfolio will also reflect the same proportions as the efficient portfolio. B) The Capital Asset Pricing Model (CAPM) assumptions hold that the return on any portfolio is the combination of the risk-free rate of return plus a risk premium proportional to the amount of systematic risk in the investment. C) Graphically, when the tangent line goes through the market portfolio, it is called the security market line (SML). D) A portfolioʹs risk premium and volatility are determined by the fraction that is invested in the market.
c
Your estimate of the market risk premium is 9%. The risk-free rate of return is 3.8% and General Motors has a beta of 1.4. According to the Capital Asset Pricing Model (CAPM), what is its expected return? A) 14.8% B) 15.6% C) 16.4% D) 17.2%
c
Your investment over one year yielded a capital gains yield of 5% and no dividend yield. If the sale price was $114 per share, what was the cost of the investment? A) $119.43 B) $103.14 C) $108.57 D) $114.00
c
Your retirement portfolio comprises 300 shares of the S&P 500 fund (SPY) and 100 shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $136 and that of AGG is $97 . If you expect the return on SPY to be 11% in the next year and the return on AGG to be 10%, what is the expected return for your retirement portfolio? A) 9.73% B) 8.65% C) 10.81% D) 10.27 %
c
A stock market comprises 2100 shares of stock A and 2100 shares of stock B. The share prices for stocks A and B are $25 and $15 , respectively. What proportion of the market portfolio is comprised of each stock? A) Stock A is 62.5% and Stock B is 37.5%. B) Stock A is 37.5% and Stock B is 62.5%. C) Stock A is 50% and Stock B is 50%. D) Stock A is 200% and Stock B is 100%.
a
A stock market comprises 4700 shares of stock A and 2300 shares of stock B. Assume the share prices for stocks A and B are $25 and $30 , respectively. What proportion of the market portfolio is comprised of stock A? A) 63.0% B) 62.0% C) 61.3% D) 79%
a
Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cureʹs blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cureʹs drugs would produce $50 million in net income. The probability of the FDA approving a drug is 50%. What is the expected payoff for Little Cureʹs ten drugs? A) $250 million B) $50 million C) $1 billion D) $0
a
Consider the following returns: The volatility on Lowesʹ returns is closest to ________. A) 35% B) 11% C) 14% D) 42%
a
Conundrum Mining is expected to generate the above free cash flows over the next four years, after which they are expected to grow at a rate of 5% per year. If the weighted average cost of capital is 11% and Conundrum has cash of $85 million, debt of $65 million, and 30 million shares outstanding, what is Conundrumʹs expected current share price? A) $12.61 B) $16.40 C) $20.18 D) $20.81
a
Diversification reduces the risk of a portfolio because ________, and some of the risks are averaged out of the portfolio. A) stocks do not move identically B) stocks have common risks C) stocks are fully predictable D) stocks are not affected by the market
a
For each 1% change in the market portfolioʹs excess return, the investmentʹs excess return is expected to change by ________ due to risks that it has in common with the market. A) beta B) alpha C) 0% D) 1%
a
Ford Motor Company had realized returns of 20%, 30%, 30%, and 20% over four quarters. What is the quarterly standard deviation of returns for Ford calculated from this sample? A) 5.77% B) 5.20% C) 6.06% D) 4.62%
a
Gonzales Corporation generated free cash flow of $88 million this year. For the next two years, the companyʹs free cash flow is expected to grow at a rate of 10%. After that time, the companyʹs free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 12% and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Gonzales Corporationʹs expected terminal enterprise value in year 2? A) $1384.24 B) $1245.82 C) $1107.39 D) $968.97
a
Greg purchased stock in Bear Stearns and Co. at a price of $88 per share one year ago. The company was acquired by JP Morgan at a price of $11 per share. What is Gregʹs return on his investment? A) -87.50 % B) -113.75 % C) -100.62 % D) -96.25 %
a
Historically, stocks have delivered a ________ return on average compared to Treasury bills but have experienced ________ fluctuations in values. A) higher, higher B) higher, lower C) lower, higher D) lower, lower
a
If a stock pays dividends at the end of each quarter, with realized returns of R1, R2, R3, and R4 each quarter, then the annual realized return is calculated as ________. A) Rannual = (1 + R1) (1 + R2) (1 + R3)( 1 + R4) - 1 B) Rannual = R1 + R2 + R3 + R4 C) Rannual = (1 + R1) (1 + R2)( 1 + R3)( 1 + R4) D)Rannual= R1+R2+R3+R4/4
a
If you want to value a firm but do not want to explicitly forecast its dividends, the simplest model for you to use is ________. A) the discounted free cash flow model B) the dividend-discount model C) the enterprise value model D) None of the above models can be used if you do not want to forecast dividends or use of debt.
a
In general, it is possible to eliminate ________ risk by holding a large portfolio of assets. A) unsystematic B) systematic C) unsystematic and systematic D) market specific
a
Investors demand a higher return for investments that have larger fluctuations in values because ________. A) they do not like risk B) they are risk seeking C) they invest for the long term D) they prefer fluctuations
a
Many former employees at AlphaEnergy, an energy trading and supply company, had a large part of their portfolio invested in AlphaEnergyʹs stock. These employees were bearing a high degree of ________ risk. A) unsystematic B) systematic C) market-specific D) non-diversifiable
a
On a particular date, FedEx has a stock price of $89.27 and an EPS of $7.11 . Its competitor, UPS, had an EPS of $0.38 . What would be the expected price of UPS stock on this date, if estimated using the method of comparables? A) $4.77 B) $7.16 C) $9.54 D) $10.50
a
Suppose you have $10,000 in cash and you decide to borrow another $10,000 at a(n) 6% interest rate to invest in the stock market. You invest the entire $20,000 in an exchange -traded fund (ETF) with a 11% expected return and a 20% volatility. The expected return on your of your investment is closest to ________. A) 7% B) 8% C) 4% D) 9.1%
a
Suppose you invest $22,500 by purchasing 200 shares of Abbott Labs (ABT) at $55 per share, 200 shares of Lowes (LOW) at $35 per share, and 100 shares of Ball Corporation (BLL) at $45 per share. The weight of Abbott Labs in your portfolio is ________. A) 48.89 % B) 39.11 % C) 29.33% D) 19.56 %
a
Suppose you invest in 100 shares of Harley-Davidson (HOG) at $40 per share and 230 shares of Yahoo (YHOO) at $25 per share. If the price of Harley-Davidson increases to $50 and the price of Yahoo decreases to $20 per share, what is the return on your portfolio? A) -1.54% B) 12.25% C) -10.50% D) -5.20%
a
Suppose you invested $100 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $2 today and then you sold it for $95 . What was your dividend yield and capital gains yield on the investment? A) 2%, -5% B) 2%, 5% C) -2%, 5% D) 5%, 2%
a
The S&P 500 index traditionally is a(n) ________ portfolio of the 500 largest U.S. stocks. A) value weighted B) equally weighted C) chain weighted D) price weighted
a
The average annual return for the S&P 500 from 1886 to 2006 is 15%, with a standard deviation of 25%. Based on these numbers, what is a 95% confidence interval for 2007ʹs returns? A) -35%, 65% B) -17.5%, 32.5% C) -25%, 55% D) -20%, 50%
a
The price of Microsoft is $30 per share and that of Apple is $58 per share. The price of Microsoft increases to $39 per share after one year and to $42 after two years. Also, shares of Apple increase to $66 after one year and to $71 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return over year 1 and year 2? Assume no dividends are paid. A) 19.32%, 7.62% B) 28.01%, 8.38% C) 23.18 %, 11.43 % D) 22.22 %, 13.71 %
a
The standard deviation of returns of ________. I. small stocks is higher than that of large stocks II. large stocks is lower than that of corporate bonds III. corporate bonds is higher than that of Treasury bills Which statement is true? A) I and III B) I, II, and III C) I and II D) I only
a
The systematic risk (beta) of a portfolio is ________ by holding more stocks, even if they each had the same systematic risk. A) unchanged B) increased C) decreased D) turned to 0
a
The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Another newspaper publishing firm (not shown) had sales of $640 million, EBITDA of $84 million, excess cash of $67 million, $14 million of debt, and 120 million shares outstanding. If the average enterprise value to sales for comparable businesses is used, which of the following is the range of reasonable share price estimates? A) $6.27 to $8.86 B) $4.59 to $12.23 C) $1.15 to $1.53 D) $6.19 to $9.32
a
There is an overall relationship between ________ and ________. Larger stocks have a lower volatility overall. A) size, risk B) mean, standard deviation C) risk aversion, size D) volatility, mean
a
Two slot machines offer to double your money 3 times out of 5. Machine A takes $10 bets and Machine B takes $100 bets on each occasion. A risk-averse investor prefers to bet on ________. A) Machine A B) Machine B C) does not matter D) none of the above
a
UPS, a delivery services company, has a beta of 1.1, and Wal-Mart has a beta of 0.7. The risk-free rate of interest is 4% and the market risk premium is 7%. What is the expected return on a portfolio with 30% of its money in UPS and the balance in Wal -Mart? A) 9.74% B) 10.23 % C) 9.25% D) 9.55%
a
UPS, a delivery services company, has a beta of 1.4, and Wal-Mart has a beta of 0.9. The risk-free rate of interest is 4% and the market risk premium is 6%. What is the expected return on a portfolio with 50% of its money in UPS and the balance in Wal -Mart? A) 10.9% B) 10.4% C) 12.0% D) 13.1%
a
Which of the following equations is INCORRECT? A) xi = Total value of portfolio / Value of investment i B) Rp = *Sigma Sign*i xiPi C) Rp = x1P1 + x2P2 + ... + xnPn D) E[Rp] = E[*Sigma Sign*i xiRi]
a
Which of the following should be done by a manager wishing to raise his stockʹs price? I. Focus on maximizing the present value (PV) of the free cash flow. II. Focus on accounting earnings. III. Focusonfinancialpolicy. A) I only B) II only C) I and II D) II and II
a
Which of the following statements is FALSE? A) As the enterprise value represents the entire value of a firm before the firm pays its debt, to form an appropriate multiple, we divide it by a measure of earnings or cash flows after interest payments are made. B) We can compute a firmʹs price-earnings ratio by using either trailing earnings or forward earnings with the resulting ratio called the trailing price-earnings or forward price-earnings. C) It is common practice to use valuation multiples based on a firmʹs enterprise value. D) Using a valuation multiple based on comparables is best viewed as a shortcut to the discounted cash flow method of valuation.
a
Which of the following statements is FALSE? A) The risk premium of a security is equal to the market risk premium divided by the amount of market risk present in the securityʹs returns measured by its beta with the market. B) The beta of a portfolio is the weighted average beta of the securities in the portfolio. C) There is a linear relationship between a stockʹs beta and its expected return. D) A security with a negative beta has a negative correlation with the market, which means that this security tends to perform well when the rest of the market is doing poorly.
a
Which of the following statements is FALSE? A) We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio that is better in terms of both expected return and volatility. B) We can rule out inefficient portfolios because they represent inferior investment choices. C) The volatility of the portfolio will differ, depending on the correlation between the securities in the portfolio. D) Correlation has no effect on the expected return on a portfolio.
a
Which of the following statements is FALSE? A) While the sign of a correlation is easy to interpret, its magnitude is not. B) Independent risks are uncorrelated. C) When the covariance equals 0, the returns are uncorrelated. D) To find the risk of a portfolio, we need to know more than the risk and return of the component stocks; we need to know the degree to which the stocksʹ returns move together.
a
Which of the following statements is FALSE? A) Without trading, the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return. B) The expected return of a portfolio is simply the weighted average of the expected returns of the investments within the portfolio. C) Portfolio weights add up to 1 so that they represent the way we have divided our money between the different individual investments in the portfolio. D) A portfolio weight is the fraction of the total investment in the portfolio held in an individual investment in the portfolio.
a
While ________ seems to be a reasonable measure of risk when evaluating a large portfolio, the ________ of an individual security does not explain the size of its average return. A) volatility, volatility B) the mean return, standard deviation C) mode, volatility D) mode, mean return
a
You expect General Motors (GM) to have a beta of 1.5 over the next year and the beta of Exxon Mobil (XOM) to be 1.9 over the next year. Also, you expect the volatility of General Motors to be 50% and that of Exxon Mobil to be 35% over the next year. Which stock has more systematic risk? Which stock has more total risk? A) XOM, GM B) GM, XOM C) GM, GM D) XOM, XOM
a
You observe the following scatterplot of Fordʹs weekly returns against the S&P 500. Which of the following statements is true about Fordʹs beta against the S&P 500? A) Fordʹs beta appears to be positive. B) Fordʹs beta appears to be negative. C) Fordʹs beta appears to be zero. D) Beta has nothing to do with the relationship seen in this scatterplot.
a
You own shares in Supernova Inc. that were purchased at a price of $23 per share. Quicksilver Inc. has offered to purchase Supernova Inc. and buy your shares at a price of $34 per share. What will be your return if you tender your shares to Quicksilver Inc. and the deal is completed? A) 47.83 % B) 33.48 % C) 50.22% D) 45.43%
a
Your retirement portfolio comprises 100 shares of the Standard & Poorʹs 500 fund (SPY) and 100 shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $118 and that of AGG is $97. If you expect the return on SPY to be 11% in the next year and the return on AGG to be 6%, what is the expected return for your retirement portfolio? A) 8.74% B) 10.06 % C) 7.43% D) 7.87%
a
A companyʹs stock price jumped when it announced that its revenue had decreased because of the quality issues of its products. This is an example of ________. A) market risk B) unsystematic risk C) systematic risk D) undiversifiable risk
b
A portfolio has 30% of its value in IBM shares and the rest in Microsoft (MSFT). The volatility of IBM and MSFT are 35% and 30%, respectively, and the correlation between IBM and MSFT is 0.5. What is the standard deviation of the portfolio? A) 23.61 % B) 27.78 % C) 31.95% D) 30.56 %
b
A stock market comprises 2400 shares of stock A and 2400 shares of stock B. The share prices for stocks A and B are $15 and $5, respectively. What is the capitalization of the market portfolio? A) $43,200 B) $48,000 C) $55,200 D) $52,800
b
A stock market comprises 4600 shares of stock A and 1600 shares of stock B. Assume the share prices for stocks A and B are $15 and $30 , respectively. If you have $15,000 to invest and you want to hold the market portfolio, how much of your money will you invest in Stock A? A) $10,615.38 B) $8846.15 C) $6153.85 D) $5307.69
b
Aerelon Airways, a commercial airline, suffers a major crash. As a result, passengers are considered to be less likely to choose Aerelon as their carrier, and it is expected free cash flows will fall by $15 million per year for five years. If Aerelon has 55 million shares outstanding, an equity cost of capital of 10%, and no debt, by how much would Aerelonʹs shares be expected to fall in price as a result of this accident? A) $0.93 B) $1.03 C) $1.14 D) $1.34
b
Amazon.com stock prices gave a realized return of 15%, 15%, 15%, and 10% over four successive quarters. What is the annual realized return for Amazon.com for the year? A) 60.57 % B) 67.30 % C) 53.84% D) 74.03 %
b
Assume that you purchased Quicksilverʹs stock at the closing price on December 31, 2004 and sold it after the dividend had been paid at the closing price on January 26, 2005. Your total return rate (yield) for this period is closest to ________. A) 0.97% B) -4.00% C) -4.97% D) 1.06%
b
Assume that you purchased Quicksilverʹs stock at the closing price on December 31, 2004 and sold it at the closing price on December 30, 2005. Your realized annual return for the year 2005 is closest to ________. A) -47.4% B) -45.1% C) -42.9% D) -40.6%
b
Companies that sell household products and food have very little relation to the state of the economy because such basic needs do not go away. These stocks tend to have ________ betas. A) high B) low C) negative D) infinite
b
Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 20% probability that they will have a 20% return and a 80% probability that they will have a -30% return. What is the expected return for an individual firm? A) -12% B) -20% C) 10% D) 20%
b
Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 70% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return. The standard deviation for the return on an portfolio of 20 type S firms is closest to ________. A) 13.75 % B) 22.91 % C) 5.00% D) 4.58%
b
Consider the following expected returns, volatilities, and correlations: The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to ________. A) 8.1% B) 9.0% C) 10.8% D) 5.4%
b
Conundrum Mining is expected to generate the above free cash flows over the next four years, after which they are expected to grow at a rate of 6% per year. If the weighted average cost of capital is 12% and Conundrum has cash of $80 million, debt of $60 million, and 30 million shares outstanding, what is Conundrumʹs expected terminal enterprise value? A) $413.4 million B) $459.3 million C) $505.3 million D) $528.2 million
b
Fluctuations of a stockʹs return that are due to market-wide news representing common risk is the ________. A) idiosyncratic risk B) systematic risk C) unique risk D) unsystematic risk
b
IGM Realty had stock prices of $33 , $33 , $38 , $36 , and $28 at the end of the last five quarters. If IGM pays a dividend of $1 at the end of each quarter, what is the annual realized return on IGM? A) -5.62% B) -4.49% C) -4.72% D) -4.94%
b
If asset Aʹs return is exactly two times asset Bʹs return, then following risk return tradeoff, the standard deviation of asset A should be ________ times the standard deviation of asset B. A) 3 B) 2 C) 1 D) 4
b
If the Federal Reserve were to change from an expansionary to a contractionary monetary policy, this would be an example of ________. A) unsystematic risk B) systematic risk C) independent risk D) diversification risk
b
If you build a large enough portfolio, you can diversify away all ________ risk, but you will be left with ________ risk. A) diversifiable, unsystematic B) unsystematic, systematic C) systematic, undiversifiable D) undiversifiable, diversifiable
b
On a particular day, a mining company reveals that, due to new extraction technology, the extractable yield from several of its nickel/lead mines has risen by 15%. Which of the following is the LEAST likely consequence of such an announcement? A) The price of the stock would rise. B) Investors would determine that the estimates of the firmʹs value on the date prior to the announcement were too high. C) Investors would increase their forecast of future cash flows in that firm. D) Investors would revise their estimates of the net present value (NPV) of the firm.
b
Stocks tend to move together if they are affected by ________. A) company specific events B) common economic events C) events unrelated to the economy D) idiosyncratic shocks
b
Suppose the quarterly arithmetic average return for a stock is 10% per quarter and the stock gives a return of 15% each over the next two quarters. The arithmetic average return over the six quarters is ________. A) 15.17 % B) 11.67 % C) 12.83% D) 16.33 %
b
Suppose you invest in 220 shares of Johnson and Johnson (JNJ) at $70 per share and 240 shares of Yahoo (YHOO) at $20 per share. If the price of Johnson and Johnson increases to $80 and the price of Yahoo decreases to $18 per share, what is the return on your portfolio? A) 12.77 % B) 8.51% C) 9.37% D) 10.22 %
b
Suppose you invested $79 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.41 today and then you sold it for $66 . What was your return on the investment? A) -20.72 % B) -15.94 % C) -18.33% D) -17.53 %
b
Suppose you invested $93 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $0.53 today and then you sold it for $94 . What was your dividend yield and capital gains yield on the investment? A) 0.54%, 1.13% B) 0.57%, 1.08% C) 0.57%, 1.13% D) 1.08%, 1.18%
b
The Capital Asset Pricing Model asserts that the expected return ________. A) is equal to the risk-free rate plus a risk premium for unsystematic risk B) is equal to the risk-free rate plus a risk premium for systematic risk C) is equal to the risk premium plus a risk-free rate for systematic risk D) is equal to the risk premium plus a risk-free rate for unsystematic risk
b
The S&P 500 index delivered a return of 25%, 15%, -35%, and -5% over four successive years. What is the arithmetic average annual return for four years? A) -5% B) 0% C) 5% D) 3%
b
The expected return is usually ________ the baseline risk-free rate of return that we demand to compensate for inflation and the time value of money. A) lower than B) higher than C) similar to D) none of the above
b
The geometric average annual return for a large capitalization stock portfolio is 10% for ten years and 6% per year for the next five years. The geometric average annual return for the entire 15 year period is ________. A) 9.08% B) 8.65% C) 8.22% D) 9.52%
b
The price of Microsoft is $25 per share and that of Apple is $50 per share. The price of Microsoft increases to $36 per share after one year and to $41 after two years. Also, shares of Apple increase to $56 after one year and to $66 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return over year 1 and year 2? Assume no dividends are paid. A) 21.53 %, 14.67 % B) 22.67 %, 16.30 % C) 24.93 %, 18.75 % D) 22.21 %, 18.26 %
b
The risk premium of a security is determined by its ________ risk and does not depend on its ________ risk. A) systematic, undiversifiable B) systematic, unsystematic C) undiversifiable, diversifiable D) diversifiable, undiversifiable
b
The risk that is linked across outcomes is called ________. A) diversifiable risk B) common risk C) uncorrelated risk D) independent risk
b
The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Another newspaper publishing firm (not shown) had sales of $620 million, EBITDA of $81 million, excess cash of $62 million, $11 million of debt, and 120 million shares outstanding. If the firm had an EPS of $0.41 , what is the difference between the estimated share price of this firm if the average price-earnings ratio is used and the estimated share price if the average enterprise value/EBITDA ratio is used? A) -$0.08 B) -$0.13 C) -$1.27 D) -$1.39
b
The volatility of Home Depot Share prices is 50% and that of General Motors shares is 50%. When I hold both stocks in my portfolio and the stocks returns have zero correlation, the overall volatility of returns of the portfolio is ________. A) more than 25% B) less than 50% C) more than 50% D) less than 25%
b
When investing for a long term, investors care about the volatility of ________ returns and not the volatility of ________ returns. A) average, cumulative B) cumulative, average C) mean, cumulative D) mean, average
b
Which of the following investments offered the lowest overall return over the past eighty years? A) small stocks B) Treasury bills C) S&P 500 D) corporate bonds
b
Which of the following statements is FALSE? A) The covariance and correlation allow us to measure the co-movement of returns. B) Correlation is the expected product of the deviations of two returns. C) Because the stocksʹ prices do not move identically, some of the risk is averaged out in a portfolio. D) The amount of risk that is eliminated in a portfolio depends on the degree to which the stocks face common risks and their prices move together.
b
Which of the following statements is FALSE? A) The expected return of a portfolio should correspond to the portfolioʹs beta. B) Graphically, the line through the risk-free investment and the market portfolio is called the capital market line (CML). C) The beta of a portfolio is the weighted average beta of the securities in the portfolio. D) By holding a negative-beta security, an investor can reduce the overall market risk of her portfolio.
b
Which of the following statements is FALSE? A) The more cash a firm uses to repurchase shares, the less it has available to pay dividends. B) Free cash flow measures the cash generated by a firm after payments to debt or equity holders are considered. C) We estimate a firmʹs current enterprise value by computing the present value (PV) of the firmʹs free cash flow. D) We can interpret the enterprise value of a firm as the net cost of acquiring the firmʹs equity, taking its cash, and paying off all debts.
b
Which of the following statements is FALSE? A) The most common valuation multiple is the price-earnings ratio. B) You should be willing to pay proportionally more for a stock with lower current earnings. C) A firmʹs price-earnings ratio is equal to the share price divided by its earnings per share. D) The intuition behind the use of the price-earnings ratio is that when you buy a stock, you are in a sense buying the rights to the firmʹs future earnings, and differences in the scale of firmsʹ earnings are likely to persist.
b
Which of the following statements is FALSE? A) We can estimate the value of a firmʹs shares by multiplying its current earnings per share by the average price-earnings ratio of comparable firms. B) For valuation purposes, the trailing price-earnings ratio is generally preferred, since it is based on actual not expected earnings. C) Forward earnings are the expected earnings over the coming 12 months. D) Trailing earnings are the earnings over the previous 12 months.
b
Which of the following statements is TRUE? A) On average, smaller stocks have lower volatility than Treasury bills. B) Portfolios of smaller stocks are typically less volatile than individual small stocks. C) On average, smaller stocks have lower returns than larger stocks. D) On average, Treasury bills have higher returns than stocks.
b
A portfolio has three stocks --- 300 shares of Yahoo (YHOO), 300 Shares of General Motors (GM), and 80 shares of Standard and Poorʹs Index Fund (SPY). If the price of YHOO is $20, the price of GM is $30, and the price of SPY is $150, calculate the portfolio weight of YHOO and GM. A) 11.1%, 20.0% B) 16.7%, 28.3% C) 22.2%, 33.3% D) 22.2%, 43.3%
c
As we increase the number of stocks in a portfolio, the standard deviation of returns of the portfolio ________. A) increases B) remains unchanged C) decreases D) doubles
c
Assume that you purchased Quicksilverʹs stock at the closing price on December 31, 2004 and sold it after the dividend had been paid at the closing price on January 26, 2005. Your capital gains rate (yield) for this period is closest to ________. A) 0.93% B) 1.02% C) -3.85% D) -2.93%
c
Assume that you purchased Quicksilverʹs stock at the closing price on December 31, 2004 and sold it after the dividend had been paid at the closing price on January 26, 2005. Your dividend yield for this period is closest to ________. A) -7.80% B) -8.53% C) 0.74% D) 0.81%
c
Banco Industries expect sales to grow at a rapid rate over the next three years, but settle to an industry growth rate of 5% in year 4. The spreadsheet above shows a simplified pro forma for Banco Industries. If Banco industries has a weighted average cost of capital of 11%, $50 million in cash, $80 million in debt, and 18 million shares outstanding, which of the following is the best estimate of Bancoʹs stock price at the start of year 1? A) $6.52 B) $11.74 C) $13.04 D) $23.48
c
Carbondale Oil announces that a well that it has sunk in a new oil province has shown the existence of substantial oil reserves. The exploitation of these reserves is expected to increase Carbondaleʹs free cash flow by $100 million per year for eight years. If investors had not been expecting this news, what is the most likely effect on Carbondaleʹs stock price upon the announcement, given that Carbondale has 80 million shares outstanding, no debt, and an equity cost of capital of 11%? A) no effect B) rise by $5.15 C) rise by $6.43 D) rise by $7.72
c
Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 60% probability that the firm will have a 20% return and a 40% probability that the firm will have a -30% return. The standard deviation for the return on a portfolio of 20 type I firms is closest to ________. A) 0.00% B) 12.25 % C) 5.48% D) 24.49 %
c
Consider the following average annual returns: What is the excess return for the portfolio of small stocks? A) 11.7% B) 16.6% C) 19.5% D) 17.6%
c
Consider the following expected returns, volatilities, and correlations: The expected return of a portfolio that is equally invested in Duke Energy and Microsoft is closest to ________. A) 15% B) 14% C) 30% D) 45%
c
Consider the following expected returns, volatilities, and correlations: The volatility of a portfolio that is equally invested in Wal-Mart and Duke Energy is closest to ________. A) 4.0% B) 0.7% C) 6.7% D) 20.1%
c
Consider the following expected returns, volatilities, and correlations: Which of the following combinations of two stocks would give you the biggest reduction in risk? A) Duke Energy and Wal-Mart B) Wal-Mart and Microsoft C) Microsoft and Duke Energy D) No combination will reduce risk.
c
Gonzales Corporation generated free cash flow of $86 million this year. For the next two years, the companyʹs free cash flow is expected to grow at a rate of 10%. After that time, the companyʹs free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 11% and Gonzales Corporation has cash of $100 million, debt of $275 million, and 100 million shares outstanding, what is Gonzales Corporationʹs expected current share price? A) $14.37 B) $11.87 C) $12.49 D) $16.24
c
Historically, the average excess return of the S&P 500 over the return of U.S. Treasury bonds has been ________ and is proxy for the market risk premium. A) between 10% and 12% B) between 14% and 16% C) between 5% and 7% D) between 11% and 13%
c
If returns on stock A are more volatile than the returns on stock B, the geometric average return of stock A will be ________ the geometric average return of stock B when their arithmetic average returns are same. A) same as B) higher than C) lower than D) always same as
c
If you want to value a firm that consistently pays out its earnings as dividends, the simplest model for you to use is the ________. A) enterprise value model B) method of comparables C) dividend-discount model D) discounted free cash flow model
c
On a particular date, the above information concerning Office Depot, Incorporated, was given on Google Finance. Its competitor, Staples Incorporated, had a stock price of $24.33 . Which of the following is closest to the EPS of Staples Incorporated if it is estimated using valuation multiples based on price-earnings ratios? A) $1.58 B) $1.84 C) $2.63 D) $14.15
c
Suppose you invest $15,000 by purchasing 200 shares of Abbott Labs (ABT) at $40 per share, 200 shares of Lowes (LOW) at $20 per share, and 100 shares of Ball Corporation (BLL) at $30 per share. The weight of Ball Corporation in your portfolio is ________. A) 50.00 % B) 40.00 % C) 20.00% D) 30.00 %
c
Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share. Suppose over the next year Ball has a return of 12.3%, Lowes has a return of 23%, and Abbott Labs has a return of -10%. The value of your portfolio over the year is ________. A) $21,916 B) $19,828 C) $20,872 D) $22,959
c
Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share. Suppose over the next year Ball has a return of 12.5%, Lowes has a return of 21%, and Abbott Labs has a return of -10%. The return on your portfolio over the year is ________. A) 0% B) 7.6% C) 3.8% D) 5.7%
c
Suppose you invest in 110 shares of Merck (MRK) at $40 per share and 120 shares of Yahoo (YHOO)at $25 per share. If the price of Merck increases to $45 and the price of Yahoo decreases to $22 per share, what is the return on your portfolio? A) 7.70% B) 4.11% C) 2.57% D) 3.47%
c
Suppose you invested $59 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of 0.38 today and then you sold it for $66 . What was your return on the investment? A) 8.76% B) 13.76 % C) 12.51% D) 10.01 %
c
Suppose you invested $60 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.63 today and then you sold it for $65 . What was your return on the investment? A) 6.57% B) 7.51% C) 9.38% D) 10.32 %
c
The Ishares Bond Index fund (TLT) has a mean and annual standard deviation of returns of 5% and 10%, respectively. What is the 66% confidence interval for the returns on TLT? A) -7%, 10% B) 5%, 10% C) -5%, 15% D) -10%, 10%
c
The S&P 500 index delivered a return of 20%, -10%, 20%, and 5% over four successive years. What is the arithmetic average annual return for four years? A) 10.50 % B) 13.13 % C) 8.75% D) 9.63%
c
The average annual return for the S&P 500 from 1886 to 2006 is 5%, with a standard deviation of 15%. Based on these numbers, what is a 95% confidence interval for 2007ʹs returns? A) -12.5%, 17.5% B) -15%, 25% C) -25%, 35% D) -25%, 25%
c
The average annual return for the S&P 500 from 1886 to 2006 is 9.5%, with a standard deviation of 18%. Based on these numbers, what is a 95% confidence interval for 2007ʹs returns? A) -13.25 %, 22.75 % B) -16.5%, 35.5% C) -26.5%, 45.5% D) -11.5%, 30.5%
c
The average annual return over the period 1926-2009 for the S&P 500 is 12.0%, and the standard deviation of returns is 21.3%. Based on these numbers, what is a 95% confidence interval for 2010 returns? A) -1.5%, 21.8% B) -10.7%, 32.8% C) -30.6%, 54.6% D) -30.6%, 76.4%
c
The market portfolio is the portfolio of all risky investments held ________. A) in descending weights B) in ascending weights C) in proportion to their value D) based on previous year performance
c
The price of Microsoft is $37 per share and that of Apple is $43 per share. The price of Microsoft increases to $42 per share after one year and to $47 after two years. Also, shares of Apple increase to $49 after one year and to $59 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return in year 1 and year 2? Assume no dividends are paid. A) 13.06 %, 14.84 % B) 10.31 %, 18.96 % C) 13.75 %, 16.48 % D) 11.69 %, 19.78 %
c
The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Another newspaper publishing firm (not shown) had sales of $600 million, EBITDA of $84 million, excess cash of $68 million, $18 million of debt, and 120 million shares outstanding. If the average enterprise value to sales for comparable businesses is used, which of the following is the best estimate of the firmʹs share price? A) $6.45 B) $7.20 C) $7.17 D) $7.53
c
The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Which of the following ratios would most likely be the most reliable in determining the stock price of a comparable firm? A) P/E B) Price/Book C) Enterprise Value/Sales D) Enterprise Value/EBITDA
c
The volatility of Home Depot share prices is 30% and that of General Motors shares is 15%. When I hold both stocks in my portfolio and the stocks returns have a correlation of 1, the overall volatility of returns of the portfolio is ________. A) more than 15% B) less than 30% C) unchanged at 30% D) equal to 15%
c
The volatility of Home Depot share prices is 30% and that of General Motors shares is 30%. When I hold both stocks in my portfolio with an equal amount in each, and the stocks returns have a correlation of minus 1, the overall volatility of returns of the portfolio is ________. A) more than 30% B) unchanged at 30% C) zero D) equal to 60%
c
UPS, a delivery services company, has a beta of 1.6, and Wal-Mart has a beta of 0.9. The risk-free rate of interest is 6% and the market risk premium is 9%. What is the expected return on a portfolio with 40% of its money in UPS and the balance in Wal -Mart? A) 14.96 % B) 15.79 % C) 16.62% D) 18.28 %
c
We can reduce volatility by investing in less than perfectly correlated assets through diversification because the expected return of a portfolio is the weighted average of the expected returns of its stocks, but the volatility of a portfolio ________. A) is higher than the weighted average volatility B) is independent of weights in the stocks C) is less than the weighted average volatility D) depends on the expected return
c
Which of the following equations is INCORRECT? A) Cov(Ri,Rj) = (1/T-1)*Sigma Sign*(Ri - Ri)(Rj - Rj) B) Var(Rp) = w1^2SD(R1) + w2^2SD(R2) + 2w1w2Corr(R1,R2)SD(R1)SD(R2) C) Corr(Ri,Rj) = Cov(Ri,Rj)/ Var(Ri)Var(Rj) D) Cov(Ri,Rj) = E[(Ri - E[Ri])(Rj - E[Rj])]
c
Which of the following investments offered the highest overall return over the past eighty years? A) Treasury bills B) S&P 500 C) small stocks D) corporate bonds
c
Which of the following is NOT a systematic risk? A) the risk that oil prices rise, increasing production costs B) the risk that the economy slows, reducing demand for your firmʹs products C) the risk that your new product will not receive regulatory approval D) the risk that the Federal Reserve raises interest rates
c
Which of the following statements concerning the valuation of firms using the method of comparables is FALSE? A) If two different firms generate identical cash flows, the Law of One Price will imply that both firms have the same value. B) Comparables adjust for scale differences when valuing similar firms. C) Valuation multiples take into account differences in the risk and future growth between the firms being compared. D) Two firms that sell very similar products or offer very similar services will have different values if they are of different sizes.
c
Which of the following statements is FALSE? A) Expected return should rise proportionately with volatility. B) Investors would not choose to hold a portfolio that is more volatile unless they expected to earn a higher return. C) Smaller stocks have lower volatility than larger stocks. D) The largest stocks are typically more volatile than a portfolio of large stocks.
c
Which of the following statements is FALSE? A) Investments with higher volatility have rewarded investors with higher average returns. B) Investments with higher volatility should have a higher risk premium and, therefore, higher returns. C) Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the returns of individual securities. D) Riskier investments must offer investors higher average returns to compensate them for the extra risk they are taking on.
c
Which of the following statements is FALSE? A) Stock returns will tend to move together if they are affected similarly by economic events. B) Stocks in the same industry tend to have more highly correlated returns than stocks in different industries. C) Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together. D) With a positive amount invested in each stock, the more the stocks move together and the higher their covariance or correlation, the more volatile the portfolio will be.
c
Which of the following statements is FALSE? A) The long-run growth rate gFCF is typically based on the expected long-run growth rate of a firmʹs revenues. B) Since a firmʹs free cash flow is equal to the sum of the free cash flows from the firmʹs current and future investments, we can interpret the firmʹs enterprise value as the total net present value (NPV) that the firm will earn from continuing its existing projects and initiating new ones. C) If a firm has no debt, then rwacc equals the risk-free rate of return. D) When using the discounted free cash flow model, we forecast a firmʹs free cash flow up to some horizon, together with some terminal (continuation) value of the enterprise.
c
Which of the following statements is FALSE? A) The risk premium of a security is determined by its systematic risk and does not depend on its diversifiable risk. B) When we combine many stocks in a large portfolio, the firm-specific risks for each stock will average out and be diversified. C) Fluctuations of a stockʹs return that are due to firm-specific news are common risks. D) The volatility in a large portfolio will decline until only the systematic risk remains.
c
You expect General Motors (GM) to have a beta of 1 over the next year and the beta of Exxon Mobil (XOM) to be 1.2 over the next year. Also, you expect the volatility of General Motors to be 30% and that of Exxon Mobil to be 40% over the next year. Which stock has more systematic risk? Which stock has more total risk? A) GM, GM B) GM, XOM C) XOM, XOM D) XOM, GM
c
You observe that AT&T stock and the S&P 500 have the following weekly returns: If this pattern of stock returns is typical of AT&T stock, and you calculated a beta against the S&P 500, which of the following is true? A) AT&Tʹs beta is negative. B) AT&Tʹs beta is zero. C) AT&Tʹs beta is positive. D) Cannot be determined from information given.
c
Your estimate of the market risk premium is 6%. The risk-free rate of return is 4%, and General Motors has a beta of 1.6. According to the Capital Asset Pricing Model (CAPM), what is its expected return? A) 12.2% B) 12.9% C) 13.6% D) 14.3%
c
An investor estimates the value of a firm which manufactures cookware by examining the cash flows of similar firms. Which of the following is assumed to be the same for these firms? A) P/E B) annual growth rates C) payout rates D) all of the above
d
As we add more uncorrelated stocks to a portfolio where the stocks are held in equal weights, the benefit of diversification is most dramatic ________. A) after 20 stocks have been added B) when there are more than 500 stocks C) when there are more than 1,000 stocks D) at the outset
d
Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cureʹs blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cureʹs drugs would produce $100 million in net income. The probability of the FDA approving a drug is 40%. What is the expected payoff for Big Cureʹs blockbuster drug? A) $100 million B) $0 C) $1 billion D) $400 million
d
Disposition effect is the tendency of individual investors to ________. A) trade too much based on the mistaken belief that they can pick winners and losers better than investment professionals B) buy stocks that have been in the news, advertised more, have very high trading volume, or recently had extreme (high or low) returns C) put too much weight on their own experience rather than considering historical evidence D) hold on to stocks that have lost value and sell stocks that have risen in value since the time of purchase
d
McCoy paid a one-time special dividend of $3.40 on October 18, 2010. Suppose you bought McCoy stock for $47.00 on July 18, 2010, and sold it immediately after the dividend was paid for $63.52 . What was your realized return from holding McCoy? A) 4.24% B) 6.36% C) 33.91% D) 42.38 %
d
On a certain date, Kastbro has a stock price of $37.50, pays a dividend of $0.64, and has an equity cost of capital of 8%. An investor expects the dividend rate to increase by 6% per year in perpetuity. He then sells all stocks that he owns in Kastbro. Given Kastbroʹs share price, was this a reasonable action? A) No, since the constant dividend growth rate gives a stock estimate of $37.50. B) No, since the constant dividend growth rate gives a stock estimate greater than $37.50. C) Yes, since the constant dividend growth rate gives a stock estimate greater than $37.50. D) No, since the difference between his calculated stock price and the actual stock price most likely indicates that his estimate of dividend growth rate was incorrect.
d
Praetorian Industries will pay a dividend of $2.50 per share this year and has an equity cost of capital of 8%. Praetorianʹs stock is currently trading at $84 per share. By comparing Praetorian with similar firms, an investor expects that its dividends will grow by up to 5% per year. What is the best next step that the investor should take regarding Praetorianʹs stock? A) Sell any Praetorian stock that she owns. B) Short Praetorianʹs stock. C) Revise Praetorianʹs equity cost of capital. D) Revise her estimate of Praetorianʹs dividend growth.
d
Suppose that a stock gave a realized return of 20% over a two-year time period and a 10% return over the third year. The geometric average annual return is ________. A) 8.28% B) 12.43 % C) 14.08% D) 16.57 %
d
Suppose you have $10,000 in cash and you decide to borrow another $10,000 at a(n) 6% interest rate to invest in the stock market. You invest the entire $20,000 in an exchange -traded fund (ETF) with a 10% expected return and a 20% volatility. Assume that the ETF you invested in returns -10%. Then the realized return on your investment is closest to ________. A) -18% B) -10% C) -23% D) -26%
d
Suppose you invest $22,500 by purchasing 200 shares of Abbott Labs (ABT) at $55 per share, 200 shares of Lowes (LOW) at $35 per share, and 100 shares of Ball Corporation (BLL) at $45 per share. The weight of Lowes in your portfolio is ________. A) 40.44 % B) 21.78 % C) 49.78% D) 31.11 %
d
Suppose you invested $100 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $2 today and then you sold it for $100. What was your dividend yield and capital gains yield on the investment? A) 2%, 2% B) 0%, 2% C) 3%, 2% D) 2%, 0%
d
The S&P 500 index delivered a return of 10%, 15%, 15%, and -30% over four successive years. What is the arithmetic average annual return for four years? A) 3.00% B) 3.50% C) 2.25% D) 2.50%
d
The excess return is the difference between the average return on a security and the average return for ________. A) Treasury bonds B) a portfolio of securities with similar risk C) a broad-based market portfolio like the S&P 500 index D) Treasury bills
d
The probability mass between two standard deviations around the mean for a normal distribution is ________. A) 66% B) 90% C) 75% D) 95%
d
The risk premium of a stock is NOT affected by its ________. A) undiversifiable risk B) market risk C) systematic risk D) unsystematic risk
d
The risk premium of a stock is not affected by its ________. A) undiversifiable risk B) typical risk C) systematic risk D) unsystematic risk
d
The volatility of Home Depot share prices is 20% and that of General Motors shares is 20%. When I hold both stocks in my portfolio, the overall volatility of the portfolio is ________. A) 20% B) 16% C) 18% D) not possible to calculate as information is inadequate
d
Which of the following is NOT an advantage of the valuation multiple method as compared to the discounted cash flow method? A) calculations based upon widely available information B) based upon actual stock prices of real firms C) does not rely on estimates of future cash flows D) takes into account important differences between different firms
d
Which of the following is the appropriate way to calculate the price of a share of a given company using the free cash flow valuation model? A) P0 = Div1/(rE - g) B) P0 = PV(Future Free Cash Flow of Firm) / (Shares Outstanding0) C) P0 = [Div1 / (rE - g)] / (Shares Outstanding0) D) P0 = (V0 + Cash0 - Debt0) / (Shares Outstanding0)
d
Which of the following statements is FALSE? A) A firmʹs weighted average cost of capital, denoted rwacc, is the cost of capital that reflects the risk of the overall business, which is the combined risk of the firmʹs equity and debt. B) Intuitively, the difference between the discounted free cash flow model and the dividend-discount model is that in the divided-discount model, a firmʹs cash and debt are included indirectly through the effect of interest income and expenses on earnings in the dividend-discount model. C) We interpret rwacc as the expected return a firm must pay to investors to compensate them for the risk of holding the firmʹs debt and equity together. D) When using the discounted free cash flow model, we should use a firmʹs equity cost of capital.
d
Which of the following statements is FALSE? A) A stockʹs return is perfectly positively correlated with itself. B) When the covariance equals 0, the stocks have no tendency to move either together or in opposition of one another. C) The closer the correlation is to -1, the more the returns tend to move in opposite directions. D) The variance of a portfolio depends only on the variance of the individual stocks.
d
Which of the following statements is FALSE? A) Even two firms in the same industry selling the same types of products, while similar in many respects, are likely to be of different size or scale. B) In the method of comparables, we estimate the value of a firm based on the value of other, comparable firms or investments that we expect will generate very similar cash flows in the future. C) Consider the case of a new firm that is identical to an existing publicly traded company. If these firms will generate identical cash flows, the Law of One Price implies that we can use the value of the existing company to determine the value of the new firm. D) A valuation multiple is a ratio of some measure of a firmʹs scale to the value of the firm.
d
Which of the following statements is FALSE? A) If two stocks move in opposite directions, the covariance will be negative. B) The correlation between two stocks has the same sign as their covariance, so it has a similar interpretation. C) The covariance of a stock with itself is simply its variance. D) The covariance allows us to gauge the strength of the relationship between stocks.
d
Which of the following statements is FALSE? A) When stocks are perfectly positively correlated, the set of portfolios is identified graphically by a straight line between them. B) An investor seeking high returns and low volatility should only invest in an efficient portfolio. C) When the correlation between securities is less than 1, the volatility of the portfolio is reduced due to diversification. D) Efficient portfolios can be easily ranked, because investors will choose from among them those with the highest expected returns.
d
You expect General Motors (GM) to have a beta of 1.3 over the next year and the beta of Exxon Mobil (XOM) to be 0.9 over the next year. Also, you expect the volatility of General Motors to be 40% and that of Exxon Mobil to be 30% over the next year. Which stock has more systematic risk? Which stock has more total risk? A) XOM, GM B) XOM, XOM C) GM, XOM D) GM, GM
d
You purchased Alpha Innovative Inc. stock at a price of $25 per share. Its price was $15 after six months and the company declared bankruptcy at the end of the next six months. The realized return over the last year is ________. A) -99% B) -75% C) -150% D) -100%
d
Your estimate of the market risk premium is 7%. The risk-free rate of return is 4%, and General Motors has a beta of 1.4. According to the Capital Asset Pricing Model (CAPM), what is its expected return? A) 10.4% B) 11.7% C) 13.1% D) 13.8%
d
