Inv Mgmt Final Review
if the risk-free rate increases, but the expected return and std dev of stock's return stays the same, the CAL of stock will have bigger int and bigger slope bigger int and smaller slope same int and bigger slope same int and smaller slope
bigger int and smaller slope
A 10 year treasury bond w/ face value of $1000 is currently offering 6% annual coupon rate and 6% yield to maturity. Is the following statement true or false? the duration of the bond is exactly 10 years
false
Bond has duration of 10 yrs. Is the statement true or false? when weighted by the present values of future CFs, avg time to all future CF of bond is greater than 10 yrs
false
T/f if stock prices decline solely because investors become more risk averse and demand a higher risk premium, expected return of stocks would decrease after the decline of stock prices
false
T/f short selling in the secondary mkt has a directly negative impact on a firm's operating performance
false
consider a firm that is 100% equity financed and the required rate of return of equity investors is 10%. the firm's earnings from its current operations is expected to produce $5/share of earnings every year in the future. the firm can choose to invest part of it's earnings in a new project that will produce a 15% return. the mgmt of the firm decides to reinvest 40% of its earnings in this new project every year and pays out the rest as a dividend. is this statement true/false? present value of growth opportunities (PVGO) for this firm is negative
false
When plotting on the standard dev (x-axis) and return (y-axis) graph, adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the _____ down, right down, left up, right up, left
up, left
In class we estimated that the alpha, beta, and R-square of Walmart are 0.6%, 0.56, and 23% respectively, using 5-year monthly returns since April 2017. Which of the following statements about our estimation result is NOT true? a) The result suggests that Walmart delivers a positive risk-adjusted return during this period according to CAPM b) The result suggests that the returns of Walmart and the market are positively correlated c) The result suggests that most of the variation in Walmart's share price can be explained by the market performance d) The result does not necessarily mean that Walmart is going to outperform in the future
C
The graph below shows the CAL of the tangency portfolio, two thirds of which is invested in a stock portfolio with expected return of 8% and standard deviation of 19.6%, and one third is invested a bond portfolio with expected return of 2% and standard deviation of 7.7%. The risk free rate is 1.5%. According to Modern Portfolio Theory, which of the following statements is NOT true? a) The difference in the Sharpe ratio between the tangency portfolio and the stock portfolio is much smaller than that between the tangency portfolio and the bond portfolio b) Suppose that an investor would like to achieve an expected return of 8%, but she can only borrow at a rate much higher than the risk free rate. The investor could potentially be better off by investing 100% of her money in the stock portfolio than borrowing money to invest in the tangency portfolio. c) If an investor would like to achieve an expected return of 3%, the investor should invest more than half of her money in the optimal risky portfolio d) The Sharpe ratio of a portfolio consisting of 50% stocks and 50% bonds is higher than the Sharpe ratio of the bond portfolio.
C
you short sell 500 shares of Bobby Bowden and Sons at $21 a share. whats your max possible gain ignoring trans costs? $21 $10500 $21000 unlimited
$10500
suppose Apple's FCFE was $70B end of last year and its FCFE will grow 10% each year in the next 2 years. after 2 years, apple's FCFE will grow at 2% per year indefinitely. required rate of rtn on apple stock is 12% for first 2 years. after 2 years, required rate becomes 10%. apple has 5 billion shares outstanding. Ignore apple's cash at hand. what should be fair price per share of apple stock at beg of year? $199.4 $177 $140.2 $156.3
$199.4
sisters corp expects to earn $3 per share next year and every year after that from existing projects. firm has access to a new project with return of 15% and its going to invest 40% of its earnings every year in this new project and pays out the rest as dividends starting next year. If investors require a 10% rate of return to invest in this firm, whats the price per share of the company according to the constant growth model? $30 $50 $45 $40
$45
suppose investors purchase a share of Firm A's stock today, with 40% probability investors will receive a $120 per share dividend payment one year later and 60% prob they will receive $80. the firm will then be liquidated and the shares will not have any further claim on the firm's liquidation value. if stock investors demand a 10% return to invest, what must be the price per share today? $89.2 $87.3 $109.1 $72.7
$87.3
you sold short 100 shares of GameStop when the stock was trading at $200/share. per margin requirement, you put $12,000 of your own money to establish a short position. three days later, GameStop's price rose to $240 and you bought and paid back the shares you borrowed. no div was paid and no int on loan. what was total profit from this? -12000 12000 4000 -4000
-4000
assume that you manage a risky portfolio w/ an expected rate of rtn of 10% and std dev of 20%. risk free rate 2%. client chooses to inv 70% in portfolio in your fund and 30% in T-bill fund. what is your Sharpe ratio of your risky portfolio and your clients portfolio overall, respectively? 0.85 and 0.6 0.5 and 0.5 0.4 and 0.4 0.4 and 0.28
0.4 and 0.4
firm raised $100M : $10M in bonds and $90M in equity. the $100M was spent on purchasing assets today. one year later, with 40% chance, the assets' value will be $160M and with 60% chance, assets' value will be $90M. ignoring other costs and expenses and no CF will be generated. regardless of what happens, firm will be liquidated and bond investors and equity investors will be paid using liquidation value. bond investors are promised a fixed payment of $15M, with no other stakeholders, whats exp return of equity investors? -2.3% 18.9% 14.4% 11.1%
11.1%
Suppose that you believe the yields on treasury bonds of different terms will all stay roughly the same one year from now as where they are today. Which of the following numbers is closest to the rate of return (nominal terms) you should expect to earn from investing in the 10-year treasury bond during the one year period? 3.5 6.5 2.2 0.4
2.2
an investor bought $16,000 worth of a stock priced at $20 per share, investor contributed $10k to position and borrowed the rest. broker charges an annual interest rate of 4% on margin loan. stock is sold at $24 per share one year later and the investor paid back loan + interest. what was the investor's rate of return? 32.2% 17.5% 29.6% 23.8%
29.6%
one day you spent a total of $5k to purchase 3 stocks: $2k A, $2k B, $1k C. purchase price per share was A $200, B $100, C $200. one day later, you sell all the shares you bought the day before. the selling price per share for stock A was $220, B $100, C $190. assume no div. what was rate of return of investing $5k in stocks? 10% -5% 0% 3%
3%
Bond has par of $1000, time to maturity of 4 yrs, and coupon rate of 8%, paid once a year. yield to maturity is 10%. whats duration of the bond? 2.83 3.87 3.56 4
3.56
a 1% point decline in yield will have the largest effect on the return of a bond with 30 years TM, 0% coupon, YTM 10% 30 years TM, 12% coupon, YTM 10% 5 years TM, 12% coupon, YTM 10% 5 years TM, 0% coupon, YTM 10%
30 years TM, 0% coupon, YTM 10%
which of the following numbers would likely to be the most reasonable expectation of annualized return from investing in stocks? 50% 20% 8% 1%
8%
one firm in S&P index produced a FCFE of $115.27/share last year. the average growth rate of free cash flows in the previous 14 years is 5%. if investors believe that, the annual growth rate of cash flows in all future years will also be 5%. current price per share is $3800. according to the constant FCFE model, what must be the discount rate that investors are applying to this stock? 6.7% 8.2% 11.4% 9.2%
8.2%
According to CAPM, which of the following statements is NOT true? a) If two firms have the same expected average future cash flows to equity, the firm with more volatile cash flows should be worth less. b) If two firms have the same expected average future cash flows to equity, the firm with more procyclical cash flows (i.e., its cash flow tends to be high when the economy booms) should be worth less. c) Investors demand higher expected return from stocks with high betas d) Mutual funds that invest in high beta stocks should outperform the market on average
A
Based on our discussion in class so far, which of the following statements is NOT true? a) When investors demand a higher return to invest in risky assets, everything else equal, the price of risky assets will increase. b) If a firm only has access to zero NPV projects, its share price is not affected by its dividend payout/reinvestment policy. c) If a firm reports very positive earnings, its share price needs not increase if the market was expecting its earnings to be strong. d) If stock prices decline solely because investors become more risk averse and demand a higher risk premium (assume expected future earnings have not changed), expected return of stocks would increase after the decline in stock prices.
A
If the risk-free rate and the expected return of a stock stays the same, but the standard deviation of the stock's returns decreases, the Capital Allocation Line (CAL) of the stock will a) have same intercept (where the CAL touches the y-axis (expected return)) and bigger slope b) have same intercept and smaller slope c) have bigger intercept and bigger slope d) have bigger intercept and smaller slope
A
Suppose that the current price of Apple stock is $170 and you believe that with 10% probability the share price will decline to $150 in two weeks, 10% probability it will increase to $190, and 80% it will stay the same at $170 in two weeks. What is the expected payoff of a call option on Apple's stock with a strike price of $180 and time to expiration of two weeks? a) $1 b) $2 c) $10 d) Negative $1
A
We used a two-stage free cash flow model to value Alphabet in class. Alphabet's FCFE was $67.012 billion in 2021. If we assume that Alphabet's free cash flow grows at a rate of 10% per year for the next 10 years and then stays constant and that the discount rate is 8.3%, the estimated price per share would be $2,789, fairly close to Alphabet's current market price. Which of the following changes to the assumptions we made would lead to a lower estimated price per share? a) Assume that Alphabet is already at the perpetuity stage and its free cash flow in all future years would be the same as the 2021 free cash flow. b) Alphabet's free cash flow grows at a rate of 13% per year for the next 10 years and then stays constant. c) Alphabet's free cash flow grows at a rate of 10% per year for the next 15 years and then stays constant. d) Assume that the discount rate is 8%
A
You bought 100 shares of Business Adventures stock for $40 a share today using your own money. Its likely end-of-year price per share depends on the state of the economy by the end of year as follows: Stock price Boom $52 Normal $44 Recession $34.5 Assume that no dividends will be paid and all three scenarios are equally likely. What is your expected return and standard deviation of your return from today to the end of the year, respectively? a) 8.75% and 17.9% b) 8.75% and 14.8% c) 6.75% and 10.2% d) 6.75% and 16.8%
A
A 10 year Treasury bond with face value of $1000 is currently offering 8% annual coupon rate and 6% yield to maturity. Which of the following statements about the bond is NOT true? a) The market price of bond is higher than $1000. b) A year from now if the yield to maturity stays the same, the market price of the bond will be higher than what it is today. c) If you buy the bond today and hold it until the bond matures and all promised payments are made, your annual expected return will be 6%. d) If the yield to maturity becomes 7% tomorrow, the price of the bond will be lower than what it is today.
B
A 10-year Treasury bond with face value of $1000 is currently offering 6% annual coupon rate and 5% yield to maturity. Which of the following statements about the bond is NOT true? a) The market price of bond is higher than $1000. b) a year from now if the yield to maturity stays the same, the market price of the bond will be higher than what it is today. c) If the yield to maturity becomes 7% tomorrow, the price of the bond will be lower than what it is today. d) The duration of the bond is less than 10 years
B
A bond has a par value of $1000 and a time to maturity of 4 years. The current yield to maturity is 6%. The duration of the bond is 3.55. If the market price drops by 2% today, what must be the new yield to maturity? a) 5.4% b) 6.6% c) 8.0% d) 8.6%
B
A bond has a par value of $1000, a time to maturity of 3 years, and an annual coupon rate of 8%. The coupon is paid once a year. The current yield to maturity is 10%. what is the duration of this bond A 1.78 B 2.78 C 3.78 D 4.78
B
According to CAPM, a) If stock A has a higher beta than stock B, the volatility (standard deviation) of stock A's return must also be higher than that of stock B. b) Everything else equal, if the market risk premium is positive and stock A has a greater covariance with the market than stock B, then the expected return of stock A must also be higher than stock B. c) If stock A has a higher standard deviation than stock B, the expected return of stock A must also be higher than stock B. d) None of the above is correct
B
Apple's stock is currently trading at $175. Suppose that one year later, with 70% probability the share price will increase to $200, and 30% it will decline by $165. Ignore any dividend payments. What is the rate of return an investor can expect to earn if he/she purchases a 100 shares at today's market price of $175. No margin is used. a) 4.3% b) 8.3% c) 14.3% d) Negative 5.7%
B
In class we used Excel Solver to find the efficient frontier for three risky assets shown in the figure below: fixed income portfolio, international stocks, and US stocks. In the figure below, the vertical line shows the expected return and the horizontal line shows that standard deviation. Assume that short sales are allowed and there are no additional costs associated with short selling. Which of the following statements is NOT true? a) The estimation result shows that none of the three risky assets is on the efficient frontier b) the estimation result shows that for some very risk-averse investors, investing 100% in the fixed income portfolio could be optimal c) The estimation result suggests that even though international stocks are very risky with low expected returns, investing in all three assets may allow investors to achieve better risk-return opportunity set than just investing in fixed income securities and US stocks d) The estimation result suggests that, if historical returns and risk are good predictors of future expected returns and risk, it is impossible to achieve an expected return of 12% and standard deviation of 15% by investing in the three portfolios
B
Suppose an investor buys one share of stock and a put option on the stock and simultaneously sells a call option on the stock with the same strike price and the same expiration date. What will be the value of her investment on the final exercise date? a) Above the strike price if the stock price rises and below if the stock price falls. b) Equal to the strike price regardless of the stock price. c) Equal to zero regardless of the stock price. d) Equal to the stock price
B
Suppose that currently you own 100 shares of Apple stock trading at $200 and you are concerned about a substantial decline in the price in the near future. How do you hedge this downside risk? a) Buy 100 call options with a strike price of $200 b) Buy 100 put options with a strike price of $200 c) Sell 100 call options with a strike price of $200 d) Sell 100 put options with a strike price of $140
B
Suppose that the stock of Fin Corp is currently trading at $90 per share. Suppose a six-month-maturity call option with exercise price of $90 sells for $10 and the semiannual interest rate is 2%. Consider the following four strategies for investing a sum of $9,000 for 6 months. Suppose the firm will not pay dividends until after the option expires. Which strategy should you choose if you believe that the price of Fin Corp share will increase to $102 in six months and you want to maximize your return? a) Invest entirely in stock, 100 shares for $90 each b) Invest entirely in at-the-money options; buy 900 calls, each selling at $10 c) Buy 100 call options for $1,000; invest remaining $8,000 in 6-month T-bills at 2% interest. d) Invest entirely in the 2% 6-month T-bill.
B
Suppose the stock now sells at $100, and the price will either increase by 20% or decrease by 20% by the end of the year. Which of the following options that expires at year end must have the highest price? a) A call option with strike price of $120. b) A put option with strike price of $90. c) A put option with strike price of $80. d) Not enough information
B
The following diagram shows the profit to an option strategy called "short straddles". By looking at the profit diagram, you can infer that this "short straddle" is constructed by: a) Buy a call option and a put option with same strike price and maturity date b) Sell a call option and a put option with same strike price and maturity date c) Buy a call option with a low strike price and sell a call option with a high strike price d) Sell a call option with a low strike price and sell a put option with a high strike price
B
Which of the following statements about bonds is NOT true? a) Bond prices and yields are inversely related b) if you want to invest in T-bonds for one year and to minimize the interest rate risk, you should invest in 30 year treasury bonds instead of 10 year treasury bonds c) Bonds offered by firms with greater default risk usually offer higher stated yields
B
Which of the following statements about the yield curve is NOT true? a) The yield curve suggests that 30-year T-bonds offer a higher yield than 3-year T-bonds b) according to the liquidity preference theory, all investors should prefer to invest in the 20 year bond because it offers the highest expected return c) According to Liquidity Preference Theory, a very risk averse investor may prefer to invest in short term bonds even though the expected return is lower d) According to the Expectations Theory, investors expect the short term interest rate to increase in the next year.
B
A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with coupon paid annually. The yield to maturity is 8% now. If the yield becomes 9% one year later after one coupon payment is made, what is the holding period return of this bond over the next year? a) .72% b) 1.85% c) 2.0% d) 3.42%
C
A bond has a par value of $1000, a time to maturity of 3 years, and an annual coupon rate of 8%. The coupon is paid once a year. The current yield to maturity is 10%. if market price drops by 2% today, whats new YTM? A 8.8 B 9.8 C 10.8 D 11.8
C
A bond has a par value of $1000, a time to maturity of 3 years, and an annual coupon rate of 8%. The coupon is paid once a year. The current yield to maturity is 10%. whats the market price of this bond? A 750 B 850 C 950 D 1050
C
A one-percentage point decline in yield will have the most effect on the price of a bond with a _________. a) Bond A with 5 years to maturity, 12% coupon rate, and yield to maturity of 10% b) Bond B with 30 years to maturity, 12% coupon rate, and yield to maturity of 10% c) Bond C with 30 years to maturity, 3% coupon rate, and yield to maturity of 10%
C
Consider a stock with current price equal to $48, and suppose the risk-free rate is 10% per year. The market price of a European put option with an exercise price of $55 and one year to maturity is $12. What must be the price of a European call option with the same exercise price and maturity? a) $8 b) $9 c) $10 d) $11
C
Assume the CAPM holds and use the following information: Expected return Beta Standard deviation Portfolio A 16% 1.8 30% Market Portfolio 12% What proportion of Portfolio A's risk (variance) cannot be diversified away? a) 0.32 b) 0.42 c) 0.52 d) 0.62
C
Consider a firm that is 100% equity financed and the required rate of return of equity investors is 12%. The firm's earnings from its current operations is expected to produce $5 per share of earnings every year in the future. In addition, the firm can choose to invest part of its earnings in a new project that will produce a 10% of return. The management of the firm decides to reinvest 40% its earnings in this new project every year and pays out the rest as dividend. Which of the following statements is NOT true? a) The firm's earnings are expected to grow by 4% per year. b) The firm's dividends are expected to grow by 4% per year. c) The value of the firm will be lower if the firm instead pays out all earnings as dividends every year.
C
If the risk-free rate stays the same but the expected return of the market becomes higher, the Security Market Line (SML) will a) have a bigger intercept and a bigger slope b) have a smaller intercept and a smaller slope c) have same intercept and a bigger slope d) have same intercept and same slope
C
Suppose that a firm is expected to pay $100 per share of dividend in one year and another $100 in two years, and is then liquidated with a zero liquidation value. If given the risk of this firm's cash flows, investors demand a 10% annualized return to invest in this firm's stock, what will be the price per share today? a) $90.9 b) $165.3 c) $173.6 d) $181.8
C
Suppose that you can invest only in two risky assets: one stock fund and one bond fund. Suppose that the stock fund' expected return and standard deviation of return are both higher than that of the bond fund. Which of the following statements is NOT true? a) The optimal allocation between the two funds depends on your risk preference b) In theory, if you want to achieve an expected return higher than that of the stock fund, you should short the bond fund and invest the proceeds from the short sale and your own cash in the stock fund c) if you want to achieve an expected rtn greater than that of the bond fund, the standard dev of your portfolio must also be higher than that of the bond fund
C
When a company suffers a big negative shock to its earnings so that it may not even generate enough earnings to make interest payment on its outstanding bond, which of the following will generally NOT happen because of the negative shock? a) The share price of the company will drop b) The yield of the company's bond will go up c) The price of call options written on the company's stock will go up
C
Which of the following provides the best example of a systematic-risk event? a) A strike by union workers hurts a firm's quarterly earnings b) Mad Cow disease in Montana hurts local ranchers and buyers of beef c) The Federal Reserve increases interest rates by 50 basis points d) A senior executive at a firm embezzles $10 million and escapes to South America.
C
Which of the following statements about beta is true? a) A stock's beta can be negative when the stock's return is positively correlated with the market return b) The beta of a risk-free asset is one c) If the standard deviation of a stock's return is smaller than the standard deviation of the market's return, the beta of the stock cannot be greater than one. d) The beta of the market portfolio is zero
C
3) The value of a call option increases when all of the following increase except for ________. a) stock price b) time to maturity c) volatility d) strike price
D
4) Suppose you take a protective put position on XLF in which you purchase the underlying stock at a price of $12 and purchase a put with a strike price of $12 and a premium of $0.50. Your profit is $1.50 when the stock price becomes __ at option expiration? a) $10.00 b) $13.00 c) $13.50 d) $14.00
D
Suppose that you believe that Apple's stock price is going to drop from $170 to $140 in the next month, which of the following investments you would NOT make? a) Buy a put option with a strike price of $170 b) Short Apple's stock c) Sell a call option with a strike price of $160 d) Use margin to buy Apple's stock
D
Which of the following statements about Capital Allocation Line (CAL) is NOT true? a) As you move along the CAL, your expected return changes b) As you move along the CAL, your risk changes c) As you move along the CAL, your Sharpe Ratio doesn't change d) As you move along the CAL, the risk premium (i.e., return in excess of the risk free rate) of your complete portfolio doesn't change
D
Which of the following statements about stock indexes is NOT true? a) Dow Jones Industrial Average is a price-weighted index b) S&P 500 is a market value-weighted index c) If the returns of all stocks in an index on a given day are all positive, the return of the index must also be positive d) If a company in the Dow Jones index does a 2-for-1 stock split (an additional share is given for each share held by a shareholder and share price is reduced by half), the importance of this company relative to other companies in the index will not change.
D
.In a simple MPT world where investors can invest in a risk-free asset and a risky stock portfolio and a risky bond portfolio The expected return of the stock portfolio is higher than that of the bond portfolio, which is in turn higher than the risk-free rate. Assume that the correlation between stocks' returns and bonds' returns is zero. Investors can borrow at the risk free rate. Is this statement true or false? The optimal risky portfolio has a higher expected return than either the stock portfolio or the bond portfolio.
False
Graph below shows the CAL of tangency portfolio, two thirds of which is invested in a stock portfolio with an exp rtn of 8% and std dev of 19.6% and one third invested in a bond portfolio with exp rtn of 2% and std dev of 7.7%. risk free rate is 1.5% and investors can borrow at the risk free rate. according to modern portfolio theory, is this true or false? if an investor borrows at risk free rate and uses leverage to invest in the tangency portfolio to achieve an expected return of 8%, the standard deviation of this portfolio would be larger than 19.6%.
False
In class we examined the historical returns of stocks and 10 year treasury bonds from 2005-21. the avg return of stocks and T bonds was 11.9% and 4.4%, respectively. The standard deviation of returns of stocks and T-bonds was 16% and 8%, respectively. The correlation coefficient between stocks' and bonds return is -0.594. Is this statement true or false? Over past 17 years, when stocks' return was above its average, bonds return also tends to be above its average
False
T/F if company were to do 2-for-1 stock split (an additional share given for each share held by shareholder, reducing share price by half), the importance of this company relative to other companies in the index wouldn't change.
False
T/F when a firm pays out $1 per share div to investors, the firm's market value should not be affected by the dividend payment
False
is the statement about equity and debt securities T/F? when a company is liquidated, shareholders are the first in line to receive payments from the liquidation.
False
t/f if you purchase 100 shares of a company's stock, your future CF is fixed if the firm does not default
False
.In a simple MPT world where investors can invest in a risk-free asset and a risky stock portfolio and a risky bond portfolio The expected return of the stock portfolio is higher than that of the bond portfolio, which is in turn higher than the risk-free rate. Assume that the correlation between stocks' returns and bonds' returns is zero. Investors can borrow at the risk free rate. Is this statement true or false? Investing 100% in the optimal risky portfolio could be optimal for some investors.
True
.In a simple MPT world where investors can invest in a risk-free asset and a risky stock portfolio and a risky bond portfolio The expected return of the stock portfolio is higher than that of the bond portfolio, which is in turn higher than the risk-free rate. Assume that the correlation between stocks' returns and bonds' returns is zero. Investors can borrow at the risk free rate. Is this statement true or false? Investing in the risk-free asset and the optimal risky portfolio allows investors to achieve the highest expected return for a given level of risk.
True
.In a simple MPT world where investors can invest in a risk-free asset and a risky stock portfolio and a risky bond portfolio The expected return of the stock portfolio is higher than that of the bond portfolio, which is in turn higher than the risk-free rate. Assume that the correlation between stocks' returns and bonds' returns is zero. Investors can borrow at the risk free rate. Is this statement true or false? The optimal risky portfolio has a higher Sharpe ratio than either the stock portfolio or the bond portfolio.
True
In class we examined the historical returns of stocks and 10 year treasury bonds from 2005-21. the avg return of stocks and T bonds was 11.9% and 4.4%, respectively. The standard deviation of returns of stocks and T-bonds was 16% and 8%, respectively. The correlation coefficient between stocks' and bonds return is -0.594. Is this statement true or false? Over past 17 years, stocks' returns deviated more from its average return than bonds
True
In class we examined the historical returns of stocks and 10 year treasury bonds from 2005-21. the avg return of stocks and T bonds was 11.9% and 4.4%, respectively. The standard deviation of returns of stocks and T-bonds was 16% and 8%, respectively. The correlation coefficient between stocks' and bonds return is -0.594. Is this statement true or false? over the past 17 years, stocks delivered higher returns than 10 year t bonds
True
In class we examined the historical returns of stocks and 10 year treasury bonds from 2005-21. the avg return of stocks and T bonds was 11.9% and 4.4%, respectively. The standard deviation of returns of stocks and T-bonds was 16% and 8%, respectively. The correlation coefficient between stocks' and bonds return is -0.594. Is this statement true or false? the standard dev of a portfolio consisting of 50% stocks and 50% bonds is lower than the avg of standard deviations of stocks and bonds' returns
True
T/F Dow Jones is a price weighted index
True
T/F S&P 500 is a market value weighted index
True
T/F expected rising interest rates was partly responsible for the stock market decline last month
True
T/F if the return of all stocks in portfolio are pos, the portfolio has to be pos for that day
True
is the statement about equity and debt securities T/F? bond holders usually cannot vote on matters of company operations unless the company defaults on its debt.
True
is the statement about equity and debt securities T/F? debt securities usually pay a specified CF over a specific period
True
is the statement about equity and debt securities T/F? when you buy 100 shares of a company's stock, you gain partial ownership of that company
True
there's substantial variation in PE ratios across industries and firms. which of the following is UNLIKELY to explain this variation? required rate of return investors demand to invest in a firm expected earnings growth the profitability of firm's future investment amount of dividend that a firm has paid out in the past
amt of div firm has paid in past
we used a 2-stage free CF model to value alphabet in class. alphabet's FCFE was $67.012 B in 2021. assuming alphabet's free CF grows at a rate of 10% per year for the next 10 years and then stays constant and that the discount rate is 8.3%, the estimated price per share would be $2,789, fairly close to alphabet's current market price. which of the following changes to the assumptions we made would lead to a HIGHER estimated PPS? assume discount rate is 8.5% assume alphabet is already at the perpetuity stage and its free CF in all future years would be the same as the 2021 free cash flow assume alphabet's free CF grows at a rate of 8% per year for the next 10 years and then stays constant assume alphabet's free CF grows at a rate of 10% per year for the next 15 years and then stays constant
assume alphabet's free CF grows at a rate of 10% per year for the next 15 years then stays constant
consider a firm that is 100% equity financed and the required rate of return of equity investors is 10%. the firm's earnings from its current operations is expected to produce $5/share of earnings every year in the future. the firm can choose to invest part of it's earnings in a new project that will produce a 15% return. the mgmt of the firm decides to reinvest 40% of its earnings in this new project every year and pays out the rest as a dividend. is this statement true/false? the firm's dividends are expected to grow by 4% this year
false
consider a firm that is 100% equity financed and the required rate of return of equity investors is 10%. the firm's earnings from its current operations is expected to produce $5/share of earnings every year in the future. the firm can choose to invest part of it's earnings in a new project that will produce a 15% return. the mgmt of the firm decides to reinvest 40% of its earnings in this new project every year and pays out the rest as a dividend. is this statement true/false? the firm's earnings are expected to grow by 4% per year
false
consider bond that matures in 1 yr, w/ par value of $1000, one-time coupon pmt at maturity of $20, and yield of 7%. investors currently expect that there is a 20% prob that the issuer will default and if it does, only 80% of promised CFs will be Paid at maturity. is the statement true or false? exp rtn from investing in bond is 7%
false
since beg of yr, yield on 10 yr treasury bonds has increased by about 0.8 percentage points. is this statement T/F? if some investors believe that the yield will continue to rise to 4% in the next week, they should buy the bond now instead of buying it next week
false
suppose that the current yield to maturity for the 5 year zero coupon treasury bond is 1.5% and the current yield to maturity for the 10 yr zero coupon treasury bond is 2%. both bonds have a face value of $1000. is this statement T/F? market price of the 10 year bond is higher than that of the 5 yr bond
false
t/f treasury bond is a type of equity security
false
which of the following shocks generally leads to a decline in share prices? drop in discount rate applied to future earnings increase in expected growth rate of corporate earnings increase in risk premium (risk asset rtn- risk free rate) increase in the fraction of earnings invested in positive NPV projects
increase in risk premium
you have $100,000 to invest. your portfolio consists of a risk-free asset and a risky asset. The risk free rate is 2%. The expected return of the risky portfolio is 10%. if you wish to earn an expected return of 6% for your portfolio, you should... inv 20% in risk-free and 80% in risky portfolio inv 80% in RF and 20% in RP inv 50% in each borrow 20% at RFR and inv 120% in RP
inv 50% in each
the return of 3 stocks A B C during last week were -10 0 and 10 respectively. at the beginning of last week, A was trading at $30/share, B at $20/share, C at $10/share. market value of the companies A B C were $10B $20B $30B respectively. which of the following index constructed at the beginning of last week using the 3 stocks had the lowest return during last week? a market value weighted index an equally weighted index (each stock has same weight) price weighted index
price weighted index
T/F the riskiness of stocks can be largely attributed to the fact that shareholders are the residual claim holder on a firm's assets and CFs.
true
A 10 year treasury bond w/ face value of $1000 is currently offering 6% annual coupon rate and 6% yield to maturity. Is the following statement true or false? a year from now if the yield to maturity stays the same, the market price of the bond will be $1000
true
A 10 year treasury bond w/ face value of $1000 is currently offering 6% annual coupon rate and 6% yield to maturity. Is the following statement true or false? if the yield to maturity becomes 7% tomorrow, the price of the bond will be lower than what it is today
true
A 10 year treasury bond w/ face value of $1000 is currently offering 6% annual coupon rate and 6% yield to maturity. Is the following statement true or false? the market price of the bond is $1000
true
Bond has duration of 10 yrs. Is the statement true or false? if 0 coupon bond, duration will not be affected by change in yield
true
Bond has duration of 10 yrs. Is the statement true or false? if bond pays coupon every year, time to maturity of the bond can not be less than 10 years
true
Bond has duration of 10 yrs. Is the statement true or false? if bond's current yield is 2%, the bond price will decline by about 10% when yield increases to 3% tomorrow
true
Graph below shows the CAL of tangency portfolio, two thirds of which is invested in a stock portfolio with an exp rtn of 8% and std dev of 19.6% and one third invested in a bond portfolio with exp rtn of 2% and std dev of 7.7%. risk free rate is 1.5% and investors can borrow at the risk free rate. according to modern portfolio theory, is this true or false? difference in Sharpe ratio between the tangency portfolio and stock portfolio is much smaller than that between the tangency and bond portfolios
true
Graph below shows the CAL of tangency portfolio, two thirds of which is invested in a stock portfolio with an exp rtn of 8% and std dev of 19.6% and one third invested in a bond portfolio with exp rtn of 2% and std dev of 7.7%. risk free rate is 1.5% and investors can borrow at the risk free rate. according to modern portfolio theory, is this true or false? if an investor would like to achieve an exp rtn of 5%, the investor should invest more than half of their money in the optimal risky portfolio.
true
Graph below shows the CAL of tangency portfolio, two thirds of which is invested in a stock portfolio with an exp rtn of 8% and std dev of 19.6% and one third invested in a bond portfolio with exp rtn of 2% and std dev of 7.7%. risk free rate is 1.5% and investors can borrow at the risk free rate. according to modern portfolio theory, is this true or false? the Sharpe ratio of a portfolio consisting of 50% stocks and 50% bonds is higher than the Sharpe ratio of the bond portfolio.
true
T/F a firm's share price can increase if the firm reduces investment in -NPV projects and instead pays out the money to investors
true
consider a firm that is 100% equity financed and the required rate of return of equity investors is 10%. the firm's earnings from its current operations is expected to produce $5/share of earnings every year in the future. the firm can choose to invest part of it's earnings in a new project that will produce a 15% return. the mgmt of the firm decides to reinvest 40% of its earnings in this new project every year and pays out the rest as a dividend. is this statement true/false? the value of the firm will be lower if the firm instead pays out all earnings as dividends every year.
true
consider bond that matures in 1 yr, w/ par value of $1000, one-time coupon pmt at maturity of $20, and yield of 7%. investors currently expect that there is a 20% prob that the issuer will default and if it does, only 80% of promised CFs will be Paid at maturity. is the statement true or false? current price is $953.27
true
consider bond that matures in 1 yr, w/ par value of $1000, one-time coupon pmt at maturity of $20, and yield of 7%. investors currently expect that there is a 20% prob that the issuer will default and if it does, only 80% of promised CFs will be Paid at maturity. is the statement true or false? if investors buy bond at current market price, hold for a year, the bond's return will be 7% if issuer doesnt default
true
consider bond that matures in 1 yr, w/ par value of $1000, one-time coupon pmt at maturity of $20, and yield of 7%. investors currently expect that there is a 20% prob that the issuer will default and if it does, only 80% of promised CFs will be Paid at maturity. is the statement true or false? if investors' perceived default prob increases to 30% tmr, the yield of the bond will rise
true
since beg of yr, yield on 10 yr treasury bonds has increased by about 0.8 percentage points. is this statement T/F? expected (nominal) rate of return from investing in 10 yr T-Bonds is higher now than 3 months ago
true
since beg of yr, yield on 10 yr treasury bonds has increased by about 0.8 percentage points. is this statement T/F? investors who purchased the bonds at beg of yr most likely have had a negative return during this period
true
since beg of yr, yield on 10 yr treasury bonds has increased by about 0.8 percentage points. is this statement T/F? price of 10 yr T bond is lower than what it was at start of yr
true
suppose that the current yield to maturity for the 5 year zero coupon treasury bond is 1.5% and the current yield to maturity for the 10 yr zero coupon treasury bond is 2%. both bonds have a face value of $1000. is this statement T/F? expectation theory suggests that the expected interest rate during the second 5 years is higher than the first 5 years
true
suppose that the current yield to maturity for the 5 year zero coupon treasury bond is 1.5% and the current yield to maturity for the 10 yr zero coupon treasury bond is 2%. both bonds have a face value of $1000. is this statement T/F? if YTM dec by 0.5% tmr, the % change in bond price is lower for the 5-yr bond than for the 10-yr bond
true
suppose that the current yield to maturity for the 5 year zero coupon treasury bond is 1.5% and the current yield to maturity for the 10 yr zero coupon treasury bond is 2%. both bonds have a face value of $1000. is this statement T/F? liquidity preference theory suggests that the expected interest rate during the second 5 years does not have to be higher than the first 5 years
true
t/f allowing for short selling helps with price discovery
true
t/f buying on margin amplifies both gains and losses
true
t/f buying on margin may allow investors to achieve a higher exp return
true
t/f corporate share buybacks may not raise share prices even if it raises earnings per share
true
t/f if a firm only has access to zero NPV projects, its share price is not affected by its dividend payout/reinvestment policy
true
t/f if a firm reports very positive earnings, its share price needs not increase if the market was expecting earnings to be strong
true
t/f rising int rates may have a different effect on the price of stocks with high PE ratio and those with low PE ratio
true
t/f risk and return on financial assets are ultimately determined by the risk and return of the underlying cash flows produced by real assets
true
t/f secondary market trading does not result in money flow into or from companies
true
t/f short sales are used to profit from a price decline
true
t/f stock based compensation is one of the mechanisms to align the interests of managers with those of the shareholders
true
t/f when investors demand a higher return to invest in risky assets, everything else =, price of risky assets will decline
true
