Principles of finance chapter 8, 9, 10
The dividend discount model:
is a valuation approach based on future dividend income.
variable growth rate
is a valuation technique used when a firm's current growth rate is expected to change sometime in the future. combines the present-value cash flow equation and the constant-growth-rate model equation. both a and b
Which of the following characteristics describe the NASDAQ stock market?
is an electronic stock market without a physical trading floor. ranks second behind the NYSE in terms of total dollar value. lists approximately 3,900 domestic and foreign companies. All of the above.
Dividend yield is defined as
last four quarters of dividend income expressed as a percentage of the current stock price
The size of the firm measured as the current stock price multiplied by the number of shares outstanding is referred to as the firm's
market capitalization.
In theory, which of these is a combination of securities that places the portfolio on the efficient frontier and on a line tangent from the risk-free rate?
market portfolio
Which of these is the reward for taking systematic stock market risk?
market risk premium
Which of these is the measurement of risk for a collection of stocks for an investor?
portfolio beta
Which of these are valued as a special zero-growth case of the constant growth rate model?
preferred stock
Which of these refers to something that has not been released to the public, but is known by few individuals, likely company insiders?
privately held information
Which of these is the set of probabilities for all possible occurrences?
probability distribution
Which of the following is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc.?
public information
Investors buy stock at the
quoted ask price
Shares of stock issued to employees that have limitations on when they can be sold are known as
restricted stock.
Which of the following is the reward investors require for taking risk?
risk premium
Which of the following is typically considered the return on U.S. government bonds and bills and equals the real interest plus the expected inflation premium?
risk-free rate
Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation?
security market line
Which of the following are the stocks of small companies that are priced below $1 per share?
stock market bubble stocks
Investor enthusiasm causes an inflated bull market that drives prices too high, ending in a dramatic collapse in prices is known as
stock market bubble.
Which of these investors earn returns from receiving dividends and from stock price appreciation?
stockholders
The constant growth model assumes which of the following?
that the stock is efficiently priced
Which of these is the dollar return characterized as a percentage of money invested?
Percentage return
Which of these is a measure of risk to reward earned by an investment over a specific period of time?
coefficient of variation
As residual claimants, which of these investors claim any cash flows to the firm that remain after the firm pays all other claims?
common stockholders
Which of these is the term for portfolios with the highest return possible for each risk level?
efficient portfolios
Special rights given to some employees to buy a specific number of shares of the company stock at a fixed price during a specific period of time are known as
executive stock options.
Which of the following is the average of the possible returns weighted by the likelihood of those returns occurring?
expected return
Which of the following is the use of debt to increase an investment position?
financial leverage
Stock valuation model dynamics make clear that higher growth rates lead to
higher valuations.
Stock valuation model dynamics make clear that lower discount rates lead to
higher valuations.
The NASDAQ Composite includes
all of the stocks listed on the NASDAQ Stock Exchange.
Which of the following is a model that includes an equation that relates a stock's required return to an appropriate risk premium?
asset pricing
Trading at physical exchanges like the New York Stock Exchange and the American Stock Exchange takes place
at brokers' trading posts
The study of the cognitive processes and biases associated with making financial and economic decisions is known as
behavioral finance.
Investors sell stock at the
bid price
Which of the following is the asset pricing theory based on a beta, a measure of market risk?
capital asset pricing model
The line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio is____?
capital market line
Which of these is the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio?
capital market line
Which of these is the portion of total risk that is attributable to overall economic factors?
Market risk
The Dow Jones Industrial Average (DJIA) includes
30 of the largest (market capitalization) and most active companies in the U.S. economy.
The Standard & Poor's 500 Index includes
500 firms that are the largest in their respective economic sectors
Which of the following will only be executed if the order's price conditions are met?
A limit order
Which of these is a measure summarizing the overall past performance of an investment?
Average return
Which of these is a measure of the sensitivity of a stock or portfolio to market risk?
Beta
An asset pricing theory based on beta, a measure of risk is _____?
CAPM
Which statement is NOT true regarding efficient portfolios?
Combining stocks that do not move together provides a lot of risk reduction.
Which of these includes any capital gain (or loss) that occurred as well as any income that you received from a specific investment?
Dollar return
Which of the following is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification?
Firm specific risk
Which of the following is a true statement?
Firms can quite possibly change their stocks' risk level by substantially changing their business.
Why is the ask price higher than the bid price?
It represents the gain a market maker achieves.
Which of these is defined as a combination of investment assets held by an investor?
Portfolio
Which of the following is an index that tracks 500 companies, which allows for a great deal of diversification?
S&P 500
Sally wants to invest in only two stocks. Which pair of stocks should Sally select?
Stocks C and D move in opposite directions at the same time.
At any given time, the market value of a firm's common stock depends upon:
The company's profitability and the growth prospects for the future. The current market interest rates and the conditions in the overall stock market. Both a and b
Which of the following is defined as the volatility of an investment, which includes firm specific risk as well as market risk?
Total risk
Which of these statements is true?
When people purchase a stock, they do not know what their return is going to be—either short term or in the long run
We can estimate a stock's value by
discounting the future dividends and future stock price appreciation
The process of putting money in different types of investments for the purpose of reducing the overall risk of the portfolio is _________?
diversification
To find the percentage return of an investment
divide the dollar return by the investment's value at the beginning of the period.
Which of these is a theory that describes the types of information that are reflected in current stock prices?
efficient market hypothesis
Which of these is the investor's combination of securities that achieves the highest expected return for a given risk level?
efficient portfolio
Which of the following is NOT a necessary condition for an efficient market?
no trading or transaction costs
Which of the following is another term for market risk?
nondiversifiable risk
Many companies grow very fast at first, but slower future growth can be expected. Such companies are called
variable growth rate firms.