FINC300 - CHAP 12 & 13 (LEARNSMART)

Mona Corporation has a variance of returns of 343, while Scott Corporation has a variance of returns of 898. Which company's actual returns vary more from their mean return?

Scott Corporation

Geometric averages are ______ arithmetic averages.

smaller than

During the financial crisis of 2008, the S&P 500 Index fell by _____ percent.

37

More volatility in returns produces ______ difference between the arithmetic and geometric averages.

a larger

The dividend yield for a 1-year period is equal to the annual dividend amount divided by the ______.

beginning stock price

The excess return on a risky asset is the difference between the risky return and the ____ rate.

risk-free

A distribution tends to have a smooth shape when the number of observations is ___

very large

The percentage of a portfolio's total value that is invested in a particular asset is the portfolio _________.

weight

What are the two components of unexpected return (U) in the total return equation?

The unsystematic portion The systematic portion

True or false: The existence of traders attempting to beat the market is a necessary precondition for markets to become efficient.

True

Kate Corporation has discovered a very secret new product, but hasn't yet announced the discovery to the public. If the stock price reacts before the announcement (assuming no corporate "leaks"), the market is _____ form efficient.

strong

The Ibbotson-Sinquefield data show that over the long-term, ___.

- small-company stocks generated the highest average return - small-company stocks had the highest risk level - T-bills, which had the lowest risk, generated the lowest return

By definition, what is the beta of the average asset equal to?

1

Ascending order from lowest historical risk premium at the top to highest historical risk premium at the bottom.

1. U.S. TreasuryBills 2. Long-Term corporate bonds 3. Large company stock 4. Small company stocks

A projected IRR on a risky investment in the _____ percent range is not unusual.

10 to 20

The weighted average of the standard deviations of the assets in Portfolio C is 12.9%. Which of the following are possible values for the standard deviation of the portfolio?

12.9% 10.9% (The standard deviation of a portfolio is less than or equal to the weighted average of the standard deviations of the assets in the portfolio.)

What does the security market line depict?

It is a graphical depiction of the capital asset pricing model.

What is an uncertain or risky return?

It is the portion of return that depends on information that is currently unknown.

If you wish to create a portfolio of stocks, what is the required minimum number of stocks?

You must invest in stocks of more than one corporation.

When a dollar in the future is discounted to the present it is worth less because of the time value of money, but when a news item is discounted, it means that the market _____

already knew about most of the news item

The _______ coefficient is the amount of systematic risk present in a particular risky asset relative to that in an average asset.

beta

When a company declares a dividend, shareholders generally receive ______.

cash

The minimum required return on a new project when its risk is similar to that of projects the firm currently owns is known as the _____.

cost of capital

The second lesson from studying capital market history is that risk is _____

handsomely rewarded

An efficient market is one that fully reflects all available ______.

information

Stock prices fluctuate from day to day because of _____.

information flow

Variance is measured in ___, while standard deviation is measured in ___.

percent squared; percent

Normally, the excess rate of return on risky assets is ___.

positive

The security market line (SML) shows that the relationship between a security's expected return and its beta is ______.

positive

The principle of diversification tells us that spreading an investment across a number of assets will _____ of the risk.

some

To determine whether an investment has a positive NPV, you can compare the expected return on that new investment to what the financial market offers on an investment with _____.

the same beta

The risk-free asset has a beta of _____.

0

If you are forecasting a few decades in the future (as you might do for retirement planning) you should calculate the expected return using:

Blume's formula

True or false: Systematic risk will impact all securities in every portfolio equally.

False

Which of the following are examples of a portfolio?

Investing $100,000 in a combination of U.S. and Asian stocks Investing $100,000 in the stocks of 50 publicly traded corporations Holding $100,000 investment in a combination of stocks and bonds

Which type of risk is unaffected by adding securities to a portfolio?

Systematic risk

Which of the following are true? On average, T-bills outperform common stocks. T-bills sometimes outperform common stocks. Common stocks may experience negative returns. T-bills occasionally show negative returns.

T-bills sometimes outperform common stocks. Common stocks may experience negative returns.

Which of the following are examples of information that may impact the risky return of a stock?

The Fed's decision on interest rates at their meeting next week The outcome of an application currently pending with the Food and Drug Administration.

Which of the following are needed to describe the distribution of stock returns?

The standard deviation of returns The mean return

The Ibbotson-Sinquefield data shows that ___.

U.S. T-bills had the lowest risk or variability long-term corporate bonds had less risk or variability than stocks

When should an investor not convert convertible bonds to common stocks at the maturity date?

When the conversion value is less than the straight bond value

The calculation of a portfolio beta is similar to the calculation of _____.

a portfolio's expected return

In an efficient market:

assets are priced at the present value of their future cash flows all investments are zero NPV investments

Sharpe Ratio

calculated as the risk premium of the asset divided by the standard deviation

When new securities are added to a portfolio, the total unsystematic risk portion of that portfolio is most likely to _____.

decrease

When we _________ an announcement or a news item, we say that is has less of an impact on price because the market already factored it in.

discount

The ______ rate of return is the difference between risky returns and risk-free returns.

excess

Average returns can be calculated using _______ or arithmetic average.

geometric

The_________ (greater/lower) the risk, the greater the required return.

greater

Convertible bondholders should convert to common stock at the maturity date if the conversion value is _____.

greater than the straight bond value

The Sharpe ratio measures ___.

reward to risk

The __________ risk principle argues that the market does not reward unnecessary risk that is taken on by the investor.

systematic

When an investor is diversified only ________ risk matters.

systematic

The systematic risk principle argues that the market does not reward risks _____.

that are borne unnecessarily

Which of the following is commonly used to measure inflation?

Consumer Price Index (CPI)

Dividends are the ______ component of the total return from investing in a stock.

income

When is it profitable to convert convertible bonds to common stock at the maturity date?

When the conversion value exceeds the straight bond value.

The efficient markets hypothesis contends that _____ capital markets such as the NASDAQ are efficient.

well-organized

What is systematic risk?

It is a risk that pertains to a large number of assets.

The portfolio weight is _____.

the percentage of the total value that is invested in an asset

What is the definition of expected return?

It is the return that an investor expects to earn on a risky asset in the future.

An efficient market is one in which any change in available information will be reflected in the company's stock price ___.

immediately

If the market changes and stock prices instantly and fully reflect new information, which time path does such a change exhibit?

An efficient market reaction

Assets A and B each have an expected return of 10 percent. Asset A has a standard deviation of 12 percent while Asset B has a standard deviation of 13 percent. Which asset would a rational investor choose?

Assest A

If a security's expected return is equal to the risk-free rate of return, and the market-risk premium is greater than zero, what can you conclude about the value of the security's beta based on CAPM?

It is equal to 0.

As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk?

It is likely to decrease. It may eventually be almost totally eliminated.

According to the capital asset pricing model (CAPM), what is the expected return on a security with a beta of zero?

The risk-free rate of return

The variance of a portfolio is ________ (is/isn't) generally a simple combination of the variances of the assets in the portfolio.

isn't

It is not desirable to convert convertible bonds to common stock at the maturity date if the conversion value is _____.

lower than the straight bond value

The risk of owning an asset comes from:

surprises unanticipated events

The dividend _________ is defined as the annual dividend amount divided by the beginning stock price.

yield

In an efficient market, firms should expect to receive ______ value for securities they sell.

fair

The arithmetic average rate of return measures the ____.

return in an average year over a given period

How are the unsystematic risks of two different companies in two different industries related?

There is no relationship. Unsystematic risk is specific only to a single company or industry. Thus, one company's unsystematic risk will generally be unrelated to another company's systematic risk.

In general, the arithmetic average return is probably too _____ (low/high) for longer periods and the geometric average is probably too _____ (low/high) for shorter periods.

high; low

The geometric average rate of return is approximately equal to ___.

the arithmetic mean minus half of the variance