Business Finance Final Exam review, Business Finance Exam 3 Final Exam, Finance Test 3, Business Finance Ch. 6, Business Finance Chapter 9, Business Finance 3, Business Finance Test 2, Business Finance Exam 1, Business & Finance Review, FIN 3713 Test...
You own a stock portfolio invested 25 percent in Stock Q, 15 percent in Stock R, 20 percent in Stock S, and 40 percent in Stock T. The betas for these four stocks are 0.59, 1.66, 1.35, and 0.66, respectively. What is the portfolio beta?
0.93
A stock had returns of 8 percent, -7 percent, 3 percent, and 11 percent over the past 4 years. What is the standard deviation of this stock for the past four years?
7.9%
The average compound return earned per year over a multi-year period is called the __________ average return.
Geometric
Which one of the following statements is correct?
The greater the volatility of returns, the greater the risk premium.
Six months ago, you purchased 1,200 shares of ABC stock for $33.56 a share. You have received dividend payments equal to $0.40 a share. Today, you sold all of your shares for $36.70 a share. What is your total dollar return on this investment?
$4,248
discount rate
(ri) is the opportunity cost of capital , and is the rate that could be earned on alternative investments of equal risk.
Priority of Claims in liquidation
1) secured creditors from sales of secured assets 2) trustee's cost 3) wages subject to limits4) taxes 5) unfunded pension liabilities 6) unsecured creditors 7) preferred stock 8) common stock
You own a portfolio equally invested in a riskfree asset and two stocks. If one of the stocks has a beta of 1.15 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?
1.85
What are the arithmetic and geometric average returns for a stock with annual returns of 21 percent, 9 percent, -2 percent, and 13 percent? List the arithmetic answer first.
10.25 percent; 9.93 percent
Suppose a stock had an initial price of $72 per share, paid a dividend of $1.20 per share during the year, and had an ending share price of $79. Compute the percentage total return
11.39%
A stock has a beta of 1.4, the expected return on the market is 10 percent, and the risk-free rate is 4 percent. What must the expected return on this stock be?
12.4%
Suppose a stock had an initial price of $57 per share, paid a dividend of $1.7 per share during the year, and had an ending share price of $63. Compute the percentage total return.
13.51
You own a portfolio that has $2,250 invested in Stock A and $3,500 invested in Stock B. If the expected returns on these stocks are 12 percent and 17 percent, respectively, what is the expected return on the portfolio?(Do not round your intermediate calculations.)
15.04%
You purchased 440 shares of stock at a price of $50.16 per share. Over the last year, you have received total dividend income of $505. What is the dividend yield?
2.3%
Coefficient of Variation(CV)
A standard measure of dispersion about the expected value,that shows the risk per unit of return
Which one of the following statements best defines the efficient market hypothesis?
All securities in an efficient market are zero net present value investments.
The return earned in an average year over a multi-year period is called the _____ average return
Arithmetic
Which one of the following is a correct ranking of securities based on their volatility over the period of 1926-2010? Rank from highest to lowest. A. Large company stocks, U.S. Treasury bills, long-term government bonds. B. Small company stocks, long-term corporate bonds, large company stocks. C. Small company stocks, long-term corporate bonds, intermediate-term government bonds. D. Large company stocks, small company stocks, long-term government bonds. E. Intermediate-term government bonds, long-term corporate bonds, U.S. Treasury bills.
C. Small company stocks, long-term corporate bonds, intermediate-term government bonds.
Bankrupty(Reorganization)
Company's usually reorganization , if cant meet obligations it files under ch.11 to stop creditors from foreclosing, taking assets, and closing business and it has 120 days to file reorganization plan. court appoints a "trustee" to supervise reorganizations, management usually stays in control. "worth more alive than dead"
Suppose a stock had an initial price of $72 per share, paid a dividend of $1.20 per share during the year, and had an ending share price of $79. What was the dividend yield and the capital gains yield?
Dividend Yield 1.67% Capital Gains Yield 9.72%
Assume that the market prices of the securities that trade in a particular market fairly reflect the available information related to those securities. Which one of the following terms best defines that market?
Efficient Capital Market
Which of the following statements related to market efficiency tend to be supported by current evidence? I. Markets tend to respond quickly to new information. II. It is difficult for investors to earn abnormal returns. III. Short-run prices are difficult to predict accurately based on public information. IV. Markets are most likely weak form efficient.
I, II, and III only
Which one of the following correctly describes the dividend yield?
Next year's annual dividend divided by today's stock price.
Which one of the following is defined by its mean and its standard deviation?
Normal Distribution
Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total. Which one of the following terms most applies to Suzie's investments?
Portfolio
Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates?
Risk Premium
Which one of the following categories of securities had the highest average return for the period 1926-2010?
Small Company Stocks
Which one of the following categories of securities has had the most volatile returns over the period 1926-2010?
Small Company Stocks
Which one of the following best defines the variance of an investment's annual returns over a number of years?
The average squared difference between the actual returns and the arithmetic average return
Suppose a stock had an initial price of $72 per share, paid a dividend of $1.20 per share during the year, and had an ending share price of $61. Compute the percentage total return. What was the dividend yield and the capital gains yield?
Total Returns -13.61% Dividend Yield 1.67% Capital Gains Yield -15.28%
Which one of the following categories of securities had the lowest average risk premium for the period 1926-2010?
U.S. Treasury Bills
Which one of the following categories of securities had the lowest average risk premium for the period 1926-2010?
U.S. Treasury bills
Standard deviation is a measure of which one of the following?
Volatility
bond
a long-term debt instrument in which a borrower agrees to make payments of principal and interest, on specific dates, to the holders of the bond.
Market Risk premium
additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk, its size depends on the perceived risk of the stock market and investors' degree of risk aversion, varies from year to year but most estimates suggest that it ranges between 4% and 8% per year.
putable bond
allows holder to sell the bond back to the company prior to maturity
call provision
allows issuer to refund the bond issue if rates decline(helps the issuer , but hurts investor), bond investors require higher yields on callable bonds
bond rating
are designed to reflect the probability of a bond issue going into default.
The return earned in an average year over a multi-year period is called the _____ average return.
arithmetic
risk aversion
assumes investors dislike risk and require higher rates of return to encourage them to hold riskier securities.
bond value over time
at maturity , the value of any bond must equal its par value.
Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset?
beta
How sinking funds executed
call x% of the issue at par, for sinking fund purposes, likely to be used if (rd) is below the coupon rate and the bond sells at a premium. If you buy bonds in the open market its likely to be used if (rd) is above the coupon rate and the bond sells at a discount.
Unsystematic risk:
can be effectively eliminated by portfolio diversification.
Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk?
capital asset pricing model
sources of capital
debt,preffered stock, common equity, notes payable, longterm debt, retained earining, new common stock.
Assume that the market prices of the securities that trade in a particular market fairly reflect the available information related to those securities. Which one of the following terms best defines that market?
efficient capital market
factors affecting default and bond rating
final performance -Debt ratio -TIE ratio -current ratio Qualitative factors : Bond contract terms -secured vs. unsecured debt -senior vs. subordinated debt -Guarantee and sinking fund provisions -debt maturity
The average compound return earned per year over a multi-year period is called the _____ average return.
geometric
preferred stock
hybrid security, like bonds, preferred stockholders recieve a fixed dividend that must be paid before dividends are paid to common stockholders, companies can omit preferred dividened payments without fear of pushing the firm into bankruptcy .
Failure to Diversify
if an investor chooses to hold a one-stock portfolio (doesnt diversify) would the investor be compensated for the extra risk they bear? NO , stand alone risk is not important to a well-diversified investor.rational risk-averse investors are concerned with SDportfolio which is based upon market risk.
Default Risk
if an issuer defaults, investors recieve less than the promised return. Therefore , the expected return on corporate and municipal bonds is less than the promised return. Influenced by the issuer's financial strength and the terms of the bond contract.
Comments on Beta
if beta=1.0 the security is just as risky as the average stock. if beta >1.0 the security is riskier than average, if beta < 1.0 the security is less risky than average. Most stocks have betas in the range of 0.5 to 1.5
Callable bonds
include a deferred call provision and declining call premium.
indexed bond
interest rate paid is based upon the rate of inflation
Which one of the following is an example of systematic risk?
investors panic causing security prices around the globe to fall precipitously
CAPM
investors seem to be concerned with both market risk and total risk,therefore the SML may not produce a correct estimate of Ri . concepts are based upon expectations but beta are calculated using historial data.A company's historial data may not reflect investors expectation about future riskiness.
Collections
is counter cyclical with the economy and has a negative correlation. This is usual
investment risk
is related to the probability of earning a low or negative actual return, the greater the chance of lower than expected, or negative return, the riskier the investment.
reinvestment risk
is the concern that (rd) will fall and future CFs will have to be reinvested at lower rates, hence reducing income,
warrant
long-term option to buy a stated number of share common stock at a specified price
convertible bonds
may be exchanged for common stock of the firm, at the holder's option
Beta
measures a stock's market risk,and shows a stock's volatility relative to the market, indicates how risky a stock is if the stock is held in a well-diversified portfolio
standard deviations
measures total, or stand-alone risk, the larger the standard deviation is the lower the probabity that actaul returns will be close to expected return, the larger associated with a wider probability distribution of returns
other factors affecting default risk
miscellaneous qualitative factors -earning stability -regulatory environment -potential antitrust or product liabilites -pension liabilities -potential labor problems
types of bonds
mortgage bonds, debentures, subordinated debentures, investment-grade bonds, junk bonds.
general comments
most stocks are positively (through not perfectly) correlated with the market, combining stocks in a portfolio generally lowers risk
High Tech
moves with economy and has a positive correlation. This is typical
Which one of the following correctly describes the dividend yield?
next year's annual dividend divided by today's stock price
Which one of the following is defined by its mean and its standard deviation?
normal distribution
in equilibrium we assume that a stock's price equals its intrinsic value
outsiders estimate intrinsic value to help determine which stocks are attractive to buy and or sell, stocks with a price below (above) its intrinsic value are undervalued(overvalued)
income bond
pay interest only when interest is earned by the firm
diversifiable risk
portion of a security's stand alone risk that can not be eliminated through proper diversification
market risk
portion of a security's stand alone risk that cannont be eliminated through diversification measured by beta.
Bond Market
primarily traded in over the counter market , most bonds are owned by and traded among large financial institutions. The wall street reports key developments in treasury, corporate , municipal markets.
sinking fund
provision to pay off a loan over its life rather than all at maturity, similar to amortization on a term loan, reduces risk to investor, shorten average maturity, but not good for investors if rates decline after issuance.
Facts about common stock
represents ownership,ownership implies control, stockholders elect directors,directors elect management, management's goal :maximize the stock price.
The excess return is computed as the:
return on a risky security minus the risk-free rate.
Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return?
risk premium
The expected risk premium on a stock is equal to the expected return on the stock minus the:
risk-free rate.
Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?
security market line
Which one of the following categories of securities had the highest average return for the period 1926-2010?
small company stocks
Which one of the following categories of securities has had the most volatile returns over the period 1926-2010?
small-company stocks
The principle of diversification tells us that:
spreading an investment across many diverse assets will eliminate some of the total risk.
two types of investment risk
stand-alone risk, portfolio risk
adding stocks
standard deviation portfolio decreases as s stocks are added because they would not be perfectly correlated with the existing portfolio. eventually the diversification benefits of adding stocks dissipates (after 40 stocks) and for large stock portfolios . tends to converge to 20%
The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than _____ form efficient.
strong
Capital Asset Pricing Model(CAPM)
suggests that there is security market line(SML) that states that a stock's required return equals the risk-free return plus a risk premium that reflects the stock's risk after diversification. In conclusion the relevant risk of a stock is its contribution to the riskiness of a well-diversified portfolio.
Which one of the following is a risk that applies to most securities?
systematic
risk premium
the difference between the return on a risky asset and a riskless asset, which serves as compensation for investors to hold riskier securities.
Efficient financial markets fluctuate continuously because:
the markets are continually reacting to new information.
Failure to diversify part 2
there can only be one price(the market return) for a given security, no compensation should be earned for holding unnecessary , diversifiable risk.
Standard deviation measures which type of risk?
total
Bankrupty (liquidation)
unsecured creditors generally receive nothing. this makes them more willing to participate in reorganization even though their claims are greatly scaled back.
Which one of the following risks is irrelevant to a well-diversified investor?
unsystematic risk
Standard deviation is a measure of which one of the following?
volatility
Calculating beta
well-diversified investors are primarily concerned with how a stock is expected to move relative to the market in the future, the slope of the regression line is defined as the beta coefficenent for the security.
T-Bill
will return the promise 5.5% regardless of the econonmy. No t-bill do not provide a completely risk-free return as they are still exposed to inflation. Also risky in terms of reinvestment risk, are risk-free in the default sense of the word.
Negative beta
yes if the correlation between stock i and the market is negative, if the correlation is negative the regression line would slope downward , and the beta would be negative. However beta is highly unlikely.
