FIN 380 Week 6

Which one of the following statements about market and book value is correct? All firms sell at a market-to-book ratio above 1. All firms sell at a market-to-book ratio greater than or equal to 1. All firms sell at a market-to-book ratio below 1. Most firms have a market-to-book ratio above 1, but not all.

Most firms have a market-to-book ratio above 1, but not all.

Proponents of the EMH typically advocate __________. a conservative investment strategy a liberal investment strategy an aggressive investment strategy a passive investment strategy

a passive investment strategy

Most of the stock price response to a corporate earnings or dividend announcement occurs within ________________. about 30 seconds about 10 minutes 6 months 2 years

about 10 months

A technical analyst is most likely to be affiliated with which investment philosophy? buy and hold active management passive investment index funds

active management

The strong form of the EMH states that ________ must be reflected in the current stock price. all information, including inside information all security price and volume data all costless information all publicly available information

all information, including inside information

The semistrong form of the EMH states that ________ must be reflected in the current stock price. all security price and volume data all information, including inside information all costless information all publicly available information

all publicly available information

Bill, Jim, and Shelly are all interested in buying the same stock that pays dividends. Bill plans on holding the stock for 1 year. Jim plans on holding the stock for 3 years. Shelly plans on holding the stock until she retires in 10 years. Which one of the following statements is correct? All three should be willing to pay the same amount for the stock regardless of their holding period. Bill will be willing to pay the most for the stock because he will get his money back in 1 year when he sells. Jim should be willing to pay three times as much for the stock as Bill will pay because his expected holding period is three times as long as Bill's. Shelly should be willing to pay the most for the stock because she will hold it the longest and hence will get the most dividends.

all three should be willing to pay the same amount for the stock regardless of their holding period

Proponents of the EMH think technical analysts __________. should focus on relative strength should focus on resistance levels should focus on support levels are wasting their time

are wasting their time

The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ________. book value market value liquidation value Tobin's q

book value

Which one of the following is equal to the ratio of common shareholders' equity to common shares outstanding? liquidation value per share book value per share Tobin's q market value per share

book value per share

Generally speaking, as a firm progresses through the industry life cycle, you would expect the PVGO to ________ as a percentage of share price. increase decrease stay the same No typical pattern can be expected.

decrease

Which of the following is not a method employed by followers of technical analysis? charting relative strength analysis earnings forecasting trading around support and resistance levels

earnings forecast

The value of Internet companies is based primarily on _____. current profits Tobin's q growth opportunities replacement cost

growth opportunities

The constant-growth dividend discount model (DDM) can be used only when the ___________. growth rate is less than or equal to the required return growth rate is greater than or equal to the required return growth rate is less than the required return growth rate is greater than the required return

growth rate is less than the required return

In a 1988 study, Fama and French found that the return on the aggregate stock market was __________ when the dividend yield was higher. higher lower unaffected more skewed References

higher

Even if the markets are efficient, professional portfolio management is still important because it provides investors with: I. Low-cost diversification II. A portfolio with a specified risk level III. Better risk-adjusted returns than an index I only II and III only I and II only I, II, and III

i and ii only

Which of the following statements is (are) correct? If a market is strong-form efficient, it is also semistrong- and weak-form efficient. If a market is semistrong-form efficient, it is also strong-form efficient. If a market is weak-form efficient, it is also semistrong- and strong-form efficient. If a market is strong-form efficient, it is also semistrong- but not weak-form efficient.

if a market is semistrong form efficent, it is also strong form efficient

Stock prices that are stable over time _______. indicates that returns follow a random-walk process ensure that an economy allocates its resources efficiently indicate that prices are useful indicators of true economic value indicate that the market is not incorporating new information into current stock prices

indicate that the market is not incorporating new information into current stock price.

Value stocks are more likely to have a PEG ratio _____. less than 1 equal to 1 greater than 1 less than zero

less than 1

Generally speaking, the higher a firm's ROA, the _________ the dividend payout ratio and the _________ the firm's growth rate of earnings. lower; higher higher; higher higher; lower lower; lower

lower, higher

Which one of the following is a common term for the market consensus value of the required return on a stock? dividend payout ratio intrinsic value market capitalization rate plowback ratio

market capitalization rate

The primary objective of fundamental analysis is to identify __________. well-run firms poorly run firms mispriced stocks high P/E stocks

mispriced stocks

Fundamental analysis is likely to yield best results for _______. NYSE stocks neglected stocks stocks that are frequently in the news fast-growing companies

neglected stocks

Stock market analysts have tended to be ___________ in their recommendations to investors. slightly overly pessimistic overwhelmingly optimistic overwhelmingly pessimistic slightly overly optimistic

overwhelming optimistic

Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using which approach? Active management Arbitrage Fundamental analysis Passive investment

passive investment

When stock returns exhibit positive serial correlation, this means that __________ returns tend to follow ___________ returns. positive; positive positive; zero positive; negative negative; positive

positive; positive

Which of the following is not a method employed by fundamental analysts? analyzing the Fed's next interest rate move relative strength analysis earnings forecasting estimating the economic growth rate

relative strength analysis

Evidence suggests that there may be _______ momentum and ________ reversal patterns in stock price behavior. short-run; short-run long-run; long-run long-run; short-run short-run; long-run

short-run, long-run

The term random walk is used in investments to refer to ______________. stock price changes that are random but predictable stock prices that respond slowly to both old and new information stock price changes that are random and unpredictable stock prices changes that follow the pattern of past price changes

stock price changes that are random and unpredictable

If you believe in the __________ form of the EMH, you believe that stock prices reflect all relevant information, including information that is available only to insiders. semistrong strong weak perfect

strong

The broadest information set is included in the _____. weak-form efficiency argument semistrong-form efficiency argument strong-form efficiency argument technical analysis trading method

strong form efficiency argument

Random price movements indicate ________. irrational markets that prices cannot equal fundamental values that technical analysis to uncover trends can be quite useful that markets are functioning efficiently

that markets are functionally efficiently

Small firms have tended to earn abnormal returns primarily in __________. the trough of the business cycle the peak of the business cycle the month July the month of January

the month of january

You want to earn a return of 10% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant-growth DDM, the intrinsic value of stock A _________. will be less than the intrinsic value of stock B will be the same as the intrinsic value of stock B The answer cannot be determined from the information given. will be higher than the intrinsic value of stock B

will be higher than the intrinsic value of stock B

Each of two stocks, A and B, is expected to pay a dividend of $7 in the upcoming year. The expected growth rate of dividends is 6% for both stocks. You require a return of 10% on stock A and a return of 12% on stock B. Using the constant-growth DDM, the intrinsic value of stock A _________. will be higher than the intrinsic value of stock B will be the same as the intrinsic value of stock B will be less than the intrinsic value of stock B The answer cannot be determined from the information given.

will be higher than the intrinsic value of stock b

A stock has an intrinsic value of $15 and an actual stock price of $13.50. You know that this stock ________. has a Tobin's q value < 1 will generate a positive alpha has an expected return less than its required return has a beta > 1

will generate a positive alpha

The tendency when the ______ performing stocks in one period are the best performers in the next and the current ________ performers are lagging the market later is called the reversal effect. worst; best worst; worst best; worst best; best References

worst, best