Finance 3000 ch 10 questions

The Nasdaq stock market bubble peaked at 10,816 in 2000. Two and a half years later it had fallen to 4,000. what was the percentage decline? a. -63.02% b. -69.47% c. -57.13% d. -49.18%

a. -63.02% (market decline = (4,000 - 10,816) / 10,816 = -0.6302 = -63.02%)

ABC Inc. has a dividend yield equal to 3% and is expected to grow at a 7% rate for the next 7 years. What is ABC's required return? a. 10% b. 11% c. 4% d. 5%

a. 10% (3+7=10)

Hastings Entertainment has a beta of 1.24. If the market return is expected to be 10 percent and the risk-free rate is 4 percent, what is Hastings' required return? a. 11.44% b. 12.44% c. 14.96% d. 16.40%

a. 11.44% (Hastings' required return = 4% + 1.24 x (10% - 4%) = 11.44%)

Universal Forest's current stock price is $154.00 and it is likely to pay a $5.23 dividend next year. Since analysts estimate Universal Forest will have a 13.0% growth rate, what is its required return? a. 16.40% b. 15.28% c. 13.62% d. 14.71%

a. 16.40% ($5.23/$154.00 + 0.13 = 0.1640 = 16.40%)

You have a portfolio with a beta of 3.1. What will be the new portfolio beta if you keep 85 percent of your money in the old portfolio and 15 percent in a stock with a beta of 4.5? a. 3.31 b. 3.51 c. 3.61 d. 3.71

a. 3.31 (new portfolio beta = 0.85 x 3.1 + 0.15 x 4.5 = 3.31)

Which of the following statements is correct? a. If the market strong-form efficient it must also be weak-form efficient and semi-strong efficient b. There is evidence to suggest that the market is strong-form efficient because corporate insiders have made extraordinary profits by trading on inside information c. The Efficient Market Hypothesis states that security prices will be based on their expected return d. None of these statements is correct

a. If the market is strong-form efficient it must also be weak-form efficient and semi-strong efficient

How might a small market risk premium impact people's desire to buy stocks? a. Investors with high risk aversion will be less willing to invest in stocks. b. Investors with high risk aversion will be more willing to invest in stocks. c. It will only impact the share prices. d. None of these statements is correct.

a. Investors with high risk aversion will be less willing to invest in stocks.

Which of the following is incorrect? a. Most firms would want to sell additional shares of common stock if they feel their stock is undervalued. b. Most firms would not want to repurchase shares of common stock if they feel their stock is overvalued. c. It is important for financial managers to understand market efficiency because it helps them understand how their stock prices will react to different types of decisions and news announcements. d. None of these statements are incorrect.

a. Most firms would want to sell additional shares of common stock if they feel their stock is undervalued.

Which of the following statements is correct? a. Penny stocks are the stocks of small companies that are priced below $1 per share. b. Restricted stocks are shares of stock issued to executives that have limitations on voting rights. c. The Capital Market Line graphs the relationship between return and risk (beta). d. All of these statements are correct.

a. Penny stocks are the stocks of small companies that are priced below $1 per share.

Stock A has a required return of 19%. Stock B has a required return of 11%. Assume a risk-free rate of 4.75%. Which of the following is a correct statement about the two stocks? a. Stock A is riskier b. Stock B is riskier c. The stocks have the same risk d. We would need to know if the markets are efficient to answer this question

a. Stock A is riskier

Which of the following statements is incorrect? a. The capital market line shows the relationship between return and risk as measured by the standard deviation. b. The Efficient Market Hypothesis c. The security market line shows the relationship between return and risk as measured by beta. d. None of these statements are correct.

a. The capital market line shows the relationship between return and risk as measured by the standard deviation.

US Bancorp holds a press conference to announce a positive news event that was unexpected to the market. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price falls resulting in a net increase of only $4. Given this information which of the following statements is correct? a. This is an example of a market overreaction b. This is an example of a market underreaction c. This is an example of a semi-strong efficient market d. None of these statements are correct

a. This is an example of a market overreaction

This model includes an equation that relates a stock's required return to an appropriate risk premium: a. asset pricing b. behavioral finance c. beta d. efficient markets

a. asset pricing

Special rights have been 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. a. executive stock options b. privately held information c. restricted stock d. stock market bubble

a. executive stock options

You have a portfolio with a beta of 1.25. What will be the new portfolio beta if you keep 80 percent of your money in the old portfolio and 20 percent in a stock with a beta of 1.75? a. 1.00 b. 1.35 c. 1.50 d. 3.00

b. 1.35 (new portfolio beta = 0.80 x 1.25 + 0.20 x 1.75 = 1.35)

The annual return on the S&P 500 Index was 18.1 percent. The annual T-bill yield during the same period was 6.2 percent. What was the market risk premium during that year? a. 6.2% b. 11.9% c. 18.1% d. 24.3%

b. 11.9% (average market risk premium = 18.1% - 6.2% = 11.9%)

Netflicks, Inc. has a beta of 3.61. If the market return is expected to be 13.2 percent and the risk-free rate is 7 percent, what is Netflicks' risk premium? a. 20.91% b. 22.38% c. 25.72% d. 29.38%

b. 22.38% (Netflicks' risk premium = 3.61 x (13.2% - 7%) = 22.38%)

A company has a beta of 3.25. If the market return is expected to be 14 percent and the risk-free rate is 5.5 percent, what is the company's required return? a. 22.750% b. 33.125% c. 45.500% d. 51.000%

b. 33.125% (required return = 5.5% + 3.25 x (14% - 5.5%) = 33.125%)

The annual return on the S&P 500 Index was 12.4 percent. The annual T-bill yield during the same period was 5.7 percent. What was the market risk premium during that year? a. 5.7% b. 6.7% c. 12.4% d. 18.1%

b. 6.7% (average market risk premium = 12.4% - 5.7% = 6.7%)

The average annual return on the S&P 500 Index from 1986 to 1995 was 17.6 percent. The average annual T-bill yield during the same period was 9.8 percent. What was the market risk premium during these ten years? a. 8.2% b. 7.8% c. 8.8% d. 9.8%

b. 7.8% (average market risk premium = 17.6% - 9.8% = 7.8%)

A company has a beta of 0.50. If the market return is expected to be 12 percent and the risk-free rate is 5 percent, what is the company's required return? a. 6.0% b. 8.5% c. 11.0% d. 13.5%

b. 8.5% (required return = 5% + 0.50 x (12% - 5%) = 8.5%)

The asset pricing theory based on a beta, a measure of market risk. a. Behavioral Asset Pricing Model b. Capital Asset Pricing Model c. Efficient Markets Asset Pricing Model d. Efficient Market Hypothesis

b. Capital Asset Pricing Model

Which of these is the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio? a. Capital Asset Pricing Line b. Capital Market Line c. Efficient Market Line d. Efficient Market Hypothesis

b. Capital Market Line

Which of the following is a true statement? a. The risk and return that a firm experienced in the past is also the g level for its future. b. Firms can quite possibly change their stocks' risk level by substantially changing their business. c. If a firm takes in riskier new projects over time, the firm itself will become less risky. d. If a firm takes on less risky new projects over time, the firm itself will become more risky.

b. Firms can quite possibly change their stocks' risk level by substantially changing their business.

IBM has a beta of 1.0 and Apple Computer has a beta of 3.0. Which of the following statements must be correct? a. The market risk premium for Apple must be larger than the market risk premium of IBM. b. If investors become more risk averse, the expected return of Apple will increase more than the expected return on IBM. c. Apple's expected rate of return must be three times as large as IBM's. d. None of these statements is correct.

b. If investors become more risk averse, the expected return of Apple will increase more than the expected return on IBM.

How might a large market risk premium impact people's desire to buy stocks? a. Investors with high risk aversion will be less willing to invest in stocks. b. Investors with high risk aversion will be more willing to invest in stocks. c. It will only impact the share prices. d. None of these statements is correct.

b. Investors with high risk aversion will be more willing to invest in stocks.

Stock A has a required return of 12%. Stock B has a required return of 15%. Assume a risk-free rate of 4.75%. Which of the following is a correct statement about the two stocks? a. Stock A is riskier b. Stock B is riskier c. The stocks have the same risk d. We would need to know if the markets are efficient to answer this question

b. Stock B is riskier

The constant growth model assumes which of the following? a. That there is privately held information. b. That the stock is efficiently priced. c. That there are executive stock options available to managers. d. That there is no restricted stock.

b. That the stock is efficiently priced.

In 2000, the S&P 500 Index earned 11% while the T-bill yield was 4.4%. Given this information, which of the following statements is correct with respect to the market risk premium? a. The market risk premium must have been negative. b. The market risk premium must have been positive. c. The market risk premium must have been zero. d. Unable to answer without more information.

b. The market risk premium must have been positive.

US Bancorp holds a press conference to announce a positive news event that was unexpected to the market. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price continues to increase resulting in a total increase of $11. Given this information which of the following statements is correct? a. This is an example of a market overreaction b. This is an example of a market underreaction c. This is an example of a semi-strong efficient market d. None of these statements are correct

b. This is an example of a market underreaction

The study of the cognitive processes and biases associated with making financial and economic decisions. a. asset pricing model b. behavioral finance c. efficient market hypothesis d. stock market bubble

b. behavioral finance

A measure of the sensitivity of a stock or portfolio to market risk. a. behavioral finance b. beta c. efficient market d. hedge

b. beta

This is the average of the possible returns weighted by the likelihood of those returns occurring. a. efficient return b. expected return c. market return d. required return

b. expected return

The use of debt to increase an investment position. a. behavioral finance b. financial leverage c. probability d. stock market bubble

b. financial leverage

In theory, this is a combination of securities that places the portfolio on the efficient frontier and on a line tangent from the risk-free rate. a. efficient market b. market portfolio c. probability distribution d. stock market bubble

b. market portfolio

The set of probabilities for all possible occurrences. a. probability b. probability distribution c. stock market bubble d. market probabilities

b. probability distribution

This is typically considered the return on U.S. government bonds and bills and equals the real interest plus the expected inflation premium. a. required return b. risk-free rate c. risk premium d. market risk premium

b. risk-free rate

If the Japanese stock market bubble peaked at 37,500, and two and a half years later it had fallen to 25,900, what was the percentage decline? a. -10.31% b. -27.63% c. -30.93% d. -69.07%

c. -30.93% (market decline = (25,900 - 37,500) / 37,500 = -0.3093 = -30.93%)

If the NASDAQ stock market bubble peaked at 3,750, and two and a half years later it had fallen to 2,200, what would be the percentage decline? a. -15.87% b. -17.05% c. -41.33% d. -58.67%

c. -41.33% (market decline = (2,200 - 3,750) / 3,750 = -0.4133 = -41.33%)

You have a portfolio with a beta of 0.9. What will be the new portfolio beta if you keep 40 percent of your money in the old portfolio and 60 percent in a stock with a beta of 1.5? a. 1.00 b. 1.20 c. 1.26 d. 2.40

c. 1.26 (new portfolio beta = 0.40 x 0.9 + 0.60 x 1.5 = 1.26)

Paccar's current stock price is $75.10 and it is likely to pay a $3.29 dividend next year. Since analysts estimate Paccar will have a 14.2% growth rate, what is its required return? a. 15.39% b. 17.94% c. 18.58% d. 19.62%

c. 18.58% ($3.29/$75.10 + 0.142 = 0.1858 = 18.58%)

A company has a beta of 4.5. If the market return is expected to be 14 percent and the risk-free rate is 7 percent, what is the company's risk premium? a. 7.0% b. 25.5% c. 31.5% d. 38.5%

c. 31.5% (risk premium = 4.5 x (14% - 7%) = 31.5%

A company has a beta of 3.75. If the market return is expected to be 20 percent and the risk-free rate is 9.5 percent, what is the company's required return? a. 33.250% b. 39.375% c. 48.875% d. 55.625%

c. 48.875% (required return = 9.5% + 3.75 x (20% - 9.5%) = 48.875%)

Which of the following is most correct? a. In an efficient market, investors will buy overvalued stock which will drive its price down. b. In an efficient market, investors will sell undervalued stock which will drive its price down. c. In an efficient market, investors will sell overvalued stock which will drive its price down. d. None of these statements is correct.

c. In an efficient market, investors will sell overvalued stock which will drive its price down.

You obtain beta estimates of General Electric from two different online sources and you are surprised to find that they are so different. Which of the following would not be a correct explanation for the difference? a. One source used weekly data and another used monthly data. b. One source used the S&P 500 for a market proxy and the other used the Dow Jones Industrial Average. c. One used regression analysis and the other used geometric analysis. d. All of these are correct explanations for the difference.

c. One used regression analysis and the other used geometric analysis.

Similar to the Capital Market Line except risk is characterized by beta instead of standard deviation. a. Market Risk Line b. Probability Market Line c. Security Market Line d. Stock Market Line

c. Security Market Line

Whenever a set of stock prices go unnaturally high and subsequently crash down, the market experiences what we call a(n) __________________. a. Financial meltdown b. Irrational behavior c. Stock market bubble d. None of these

c. Stock market bubble

Which of the following statements is incorrect? a. The Security Market Line shows the relationship between risk and return for any stock or portfolio. b. The y-intercept of the Security Market Line represents the return on the risk-free asset. c. The measure of risk used in creating the Security Market Line is the standard deviation. d. None of these statements are incorrect.

c. The measure of risk used in creating the Security Market Line is the standard deviation.

A theory that describes the types of information that are reflected in current stock prices. a. asset pricing b. behavioral finance c. efficient market hypothesis d. public information

c. efficient market hypothesis

The stocks of small companies that are priced below $1 per share. a. bargain stocks b. hedge fund stocks c. penny stocks d. stock market bubble stocks

c. penny stocks

This has not been released to the public, but is known by few individuals, likely company insiders. a. audited financial statements b. restricted stock c. privately held information d. insider trading

c. privately held information

Shares of stock issued to employees that have limitations on when they can be sold. a. executive stock options b. privately held information c. restricted stock d. stock market bubble

c. restricted stock

This is the reward investors require for taking risk. a. required return b. risk-free rate c. risk premium d. market risk premium

c. risk premium

Consider an asset that provides the same return no matter what economic state occurs. What would be standard deviation of this asset? a. Unable to answer since there is no data to calculate the standard deviation. b. A very low number since it would have very low risk. c. 1 d. 0

d. 0

If the risk-free rate is 8 percent and the market risk premium is 2 percent, what is the required return for the market? a. 2% b. 6% c. 8% d. 10%

d. 10% (required return = 8% + 2% = 10%)

If the risk-free rate is 10 percent and the market risk premium is 4 percent, what is the required return for the market? a. 4% b. 7% c. 10% d. 14%

d. 14% (required return = 10% + 4% = 14%)

A company's current stock price is $84.50 and it is likely to pay a $3.50 dividend next year. Since analysts estimate the company will have a 10% growth rate, what is its expected return? a. 4.14% b. 4.26% c. 10.00% d. 14.14%

d. 14.14% ($3.50/$84.50 + 0.10 = 0.1414 = 14.14%)

A company's current stock price is $65.40 and it is likely to pay a $2.25 dividend next year. Since analysts estimate the company will have an 11.25% growth rate, what is its expected return? a. 3.44% b. 3.61% c. 11.25% d. 14.69%

d. 14.69% ($2.25/$65.40 + 0.1125 = 0.1469 = 14.69%)

A company has a beta of 2.91. If the market return is expected to be 16 percent and the risk-free rate is 4 percent, what is the company's risk premium? a. 11.64% b. 12.00% c. 22.91% d. 34.92%

d. 34.92% (risk premium = 2.91 x (16% - 4%) = 34.92%)

Which of the following is correct? a. Hedge funds often sell stock they don't even own. b. Hedge funds maintain secrecy about their holdings, trading and strategies. c. Hedge funds are limited to sophisticated investors. d. All of these statements are correct.

d. All of these statements are correct.

Which of the following statements is incorrect regarding how beta is calculated? a. The company return is the independent variable. b. The market portfolio return is the dependent variable. c. Using the oldest data possible will yield the most accurate results. d. All of these statements are incorrect.

d. All of these statements are incorrect.

Which of the following is a concern regarding beta? a. Using different market proxies will result in different estimates of beta. b. A company can alter its risk level which may make the beta estimate obsolete. c. Research indicates that a company's beta does not appear to predict its future return very well. d. All of these statements are valid concerns regarding beta.

d. All of these statements are valid concerns regarding beta.

The study of the cognitive processes and biases associated with making financial and economic decisions is know as _______________. a. Efficient Thinking Hypothesis b. Financial Cognition c. Financial Leverage d. Behavioral Finance

d. Behavioral Finance

All of the following are necessary conditions for an efficient market except ____________. a. Low trading or transaction costs b. Many buyers and sellers c. Free and readily available information to market participants d. Low stock prices

d. Low stock prices

Which of the following is NOT a necessary condition for an efficient market? a. Many buyers and sellers b. No prohibitively high barriers to entry c. Free and readily available information available to all participants d. No trading or transaction costs

d. No trading or transaction costs

Which of the following is incorrect? a. Technical analysis is expected to work if markets are weak-form efficient. b. If markets are strong-form efficient then they must also be weak-form efficient. c. It is not likely that the market is strong-form efficient. d. None of these statements are incorrect.

d. None of these statements are incorrect.

This is the reward for taking systematic stock market risk. a. required return b. risk-free rate c. risk premium d. market risk premium

d. market risk premium

Which of these is the measurement of risk for a collection of stocks for an investor? a. beta b. efficient market c. expected return d. portfolio beta

d. portfolio beta

This is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc. a. audited financial statements b. generally accepted accounting principles c. privately held information d. public information

d. public information

Investor enthusiasm causes an inflated bull market that drive prices too high, ending in a dramatic collapse in prices. a. behavior finance b. efficient market c. privately held information d. stock market bubble

d. stock market bubble