Finance Final: Chp. 12, 13 & 9

Which one of the following statements best defines the efficient market hypothesis? A. Security prices in efficient markets remain steady as new information becomes available. B. Efficient markets limit competition. C. All securities in an efficient market are zero net present value investments. D. All securities provide the same positive rate of return when the market is efficient

All securities in an efficient market are zero net present value investments.

Which of the following statements are true based on the historical record for 1926-2016? A. The normal distribution curve for large-company stocks is narrower than the curve for small-company stocks. B. Returns are more predictable over the short term than they are over the long term. C. Bonds are generally a safer, or less risky, investment than are stocks. D. Risk and potential reward are inversely related.

Bonds are generally a safer, or less risky, investment than are stocks.

Which of the following are examples of diversifiable risk? I. An earthquake damages an entire town II. The federal government imposes a $100 fee on all business entities III. Employment taxes increase nationally IV. All toymakers are required to improve their safety standards

I and IV

Which of the following statements are correct concerning diversifiable risks? I. Diversifiable risks can be essentially eliminated by investing in 30 unrelated securities. II. There is no reward for accepting diversifiable risks. III. Diversifiable risks are generally associated with an individual firm or industry. IV. Beta measures diversifiable risk.

I, II, III

Which one of the following is an example of systematic risk? A. Investors panic causing security prices around the globe to fall precipitously B. A toymaker has to recall its top-selling toy C. A city imposes an additional one percent sales tax on all products D. A flood washes away a firm's warehouse

Investors panic causing security prices around the globe to fall precipitously

Which one of the following correctly describes the dividend yield? A. Next year's annual dividend divided by this year's annual dividend B. This year's annual dividend divided by today's stock price C. This year's annual dividend divided by next year's expected stock price D. Next year's annual dividend divided by today's stock price

Next year's annual dividend divided by today's stock price

Assume that last year T-bills returned 2.8 percent while your investment in large-company stocks earned an average of 7.6 percent. Which one of the following terms refers to the difference between these two rates of return? A. The standard deviation B. Geometric average return C. Risk premium D. Arithmetic average return

Risk Premium

Inside information has the least value when financial markets are: A. semiweak form efficient. B. weak form efficient. C. strong form efficient. D. semistrong form efficient.

Strong form efficient

The common stock of Alpha Manufacturers has a beta of 1.18 and an actual expected return of 13.33 percent. The risk-free rate of return is 3.3 percent and the market rate of return is 12.20 percent. Which one of the following statements is true given this information? A. To be correctly priced according to CAPM, the stock should have an expected return of 13.56 percent. B. The stock has less systematic risk than the overall market. C. The actual expected stock return indicates the stock is currently overpriced. D. The actual expected stock return will graph above the security market line; thus the stock is underpriced.

The actual expected stock return indicates the stock is currently overpriced.

The rate of return on which type of security is normally used as the risk-free rate of return? A. The S&P 500 Stock Index B. Treasury bills C. Long-term corporate bonds D. Intermediate-term corporate bonds

Treasury bills

A news flash just appeared that caused about a dozen stocks to suddenly increase in value by 12 percent. What type of risk does this news flash best represent? A. Non-diversifiable B. Unsystematic C. Market D. Portfolio

Unsystematic

A stock with an actual return that lies above the security market line has: A. more risk than that warranted by CAPM. B. a higher return than expected for the level of risk assumed. C. more systematic risk than the overall market. D. less systematic risk than the overall market.

a higher return than expected for the level of risk assumed.

examples of unsystematic risk

labor strikes, part shortages

if a stock portfolio is well diversified, then the portfolio variance: A. will be the weighted average of the variances of the individual securities in the portfolio. B. will equal the variance of the most volatile stock in the portfolio. C. may be less than the variance of the least risky stock in the portfolio. D. must be equal to or greater than the variance of the least risky stock in the portfolio

may be less than the variance of the least risky stock in the portfolio.

Another name for systematic risk

non-diversifiable

Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following? A. Portfolio weight B. Price-earnings ratio C. Portfolio return D. Degree of risk

portfolio weight

Total risk is measured by ________ and systematic risk is measured by ________. A. alpha; beta B. standard deviation; beta C. beta; alpha D. beta; standard deviation

standard dev; beta

What does beta measure?

systematic risk

Efficient financial markets fluctuate continuously because A. the markets are continually reacting to old information as that information is absorbed. B. the markets are continually reacting to new information. C. current trading systems require human intervention. D. investments produce varying levels of net present values.

the markets are continually reacting to new information.

If Beta < 1

the security is riskier than average; defensive stock

if beta > 1

then it is a aggressive stock

What does standard deviation measure?

total risk

if the market rate of return is lower than the actual return this stock is:

underpriced

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst? A. semi-weak B. Weak C. Strong D. Semi-strong

weak