Principles of Investments (Final)

The stock listing for a company shows a P/E of 18, a dividend yield of 2.4% and a closing price of $23.76. What is the amount of dividends per share? A) $0.03 B) $0.57 C) $1.03 D) $1.32

A) $0.03 B) *$0.57* C) $1.03 D) $1.32 solution: (stock price * percent dividend yield)

If stocks earn an average rate of return of 12%, their value doubles every

A) 4 years. B) *6 years.* C) 8 years. D) 12 years. solution: 72 rule (72 / 12 = 6)

One of the basic premises of security analysis, and in particular fundamental analysis, is that

A) a stock's price is based on its past cash flows rather than on anticipated future cash flows. B) market sectors do not move in concert with business cycles. C) *all securities have an intrinsic value that their market value will approach over time.* D) a security's risk has relatively little effect on the security's return.

Kelly bought a stock at a price of $22.50. She received a $1.75 dividend and sold the stock for 24.75. What is Kelly's capital gain on this investment?

A. $4.00 B. $3.75 C. *$2.25* (sold price - buy price) D. $1.75 E. none of the above

If a firm has 2 million shares outstanding and its stock trades at $25 per share, the company also has $10,000,000 in debt. The company's market capitalization is

A. $40,000,000 B. $49,000,000 C. *$50,000,000* D. $60,000,000 solution: (price per share * number of shares outstanding)

Of the following, stock _____ has the greatest level of total risk and stock ______ has the highest risk premium: Stock Beta Standard Deviation A 1.09 11% B .96 13% C 1.24 18% D 1.13 26% E .87 9%

A. (A ; B) B. (B ; E) C. (C ; D) D. *(D ; C)* E. (C ; E) solution: total level of risk = highest std highest risk premium = highest beta

On September 30, the Simpson company reported the following information on its financial statements Total current assets: $650,000 Total long-term assets: $1,080,000 Total current liabilities: $684,000 Total long-term debt: $803,000 What is the amount of stockholder's equity in the Simpson Company?

A. *243,000* B. 277,000 C. 927,000 D. 3,217,000 solution: (total assets - total liabilities)

A stock has a beta of 1.4 and an expected return of 16 percent. The risk-free rate is 4.5 percent. What is the market risk premium?

A. *8.21 percent* B. 8.28 percent C. 8.31 percent D. 8.34 percent E. 8.41 percent solution: (expected return - risk-free rate) / beta

Rising interest rates tend to:

A. *contract the level of economic activity* B. increase the level of business investment C. indicate governmental expansion of the economy D. signal the trough of a recessionary market

Which of the following is the best example of unsystematic risk?

A. *decrease in company sales* B. increase in market increase rates C. change in corporation tax rates D. increase in inflation E. this risk is related to expected portfolio returns

Companies offering their stock to the public for the first time usually seek the assistance of:

A. *investment bankers* B. the Securities and Exchange Commission C. the Federal Reserve Bank D. prospectors E. all of the above

Which of the following is expressed as "E(RM)-RF"

A. *market risk premium* B. individual security risk premium C. real rate of return D. total expected rate of return E. market rate of return

When you take a short position in equity, the profit you make is calculated on what side of the balance sheet in what account?

A. *right side ; equity* B. left side ; cash C. right side ; liabilities D. left rise ; t-bills E. left side ; value of stock

Nike (NKE) is currently trading for $84.79. Kelly wants to sell 600 shares of NKE stock at the going market price after the stock reaches $75 a share. Which type of order should she place?

A. *stop* B. limit C. market D. fixed E. loss

The Federal Reserve through monetary policy can help expand the economy by

A. *support a moderate growth of the money supply* B. lowering income taxes on individuals C. reducing tariffs such as foreign exports can increase D. increasing government spending on the national infrastructure

Where will a security plot in relation to the security market line (SML) if it has a beta of 1.1 and is overvalued?

A. *to the right of the overall market and above the SML* B. to the right of the overall market and below the SML C. to the left of the overall market and above the SML D. to the left of the overall market and below the SML E. on the SML

The common shares of the Hiboux Ltd have a book value of $21.60 and a market value of $28.60. The company pays $0.28 in dividends each quarter. What is the dividend yield?

A. 1.0% B. 1.3% C. *3.9%* D. $5.2% solution: ($0.28 * 4) /(market value)

Rob owns 300 shares of Blackwood common stock valued at $9 a share. Blackwood has declared a 3-for-1 stock split effective tomorrow. After the split, Rob win own:

A. 100 shares valued at about $27 a share B. 100 shares valued at about $3 a share C. 900 shares valued at about $27 a share D. *900 shares valued at about $3 a share*

The following portfolio has an expected return of ______ percent and a beta of _______ Security: Amount invested Expected Return Beta J $36,000 16.2% 1.47 K $24,000 10.5% 1.38 L $20,000 11.8% 1.29

A. 12.45 ; 1.38 B. 12.83 ; 1.38 C. 13.39 ; 1.23 D. *13.39 ; 1.40* step 1: sum amount invested step 2: divide by each amount step 3: multiple by expected returns step 4: multiple by beta

Christopher invests $400 today at 4% rate of return which is compounded annually. What is the future value of this investment after 4 years?

A. 342 B. 416 C. 464 D. *468* E. none of the above solution: apps, finance, tvm solver

Maxine is opening a margin account with $12,500 in cash. The initial margin is 60 percent and the maintenance margin is 40 percent. What is the maximum number of shares she can purchase of a stock which is priced at $42 a share?

A. 496 shares B. *550 shares* C. 698 shares D. 744 shares E. 842 shares

Wilma recently purchased 600 shares of Driveway Repair, Inc., stock for $31.20 a share. What is the minimum amount of cash the Federal Reserve will require for this purchase?

A. 8,424 B. *9,360* C. 10,296 D. 11,232 E. 12,168 solution: federal reserve requires 50%. 31.20 / 2 = 15.6 15.6 * 600 = 9,360

You own a stock which is expected to return 12 percent in a booming economy and 7 percent in a normal economy. If the probability of a booming economy increases, your expected return will:

A. Decrease B. Either remain constant or decrease C. Remain constant D. *Increase* E. Change but the direction of the change cannot be determined from the information given.

Which of the following best fits the description "blue chip stock"

A. Facebook B. Under Armour C. *General Electric* D. Chipotle Mexican Grill

Which of the following is the best example of systematic risk?

A. There is a a shortage of nurses B. A fire destroys a warehouse C. *Gas prices rise sharply* D. The cost of sugar increases E. Two firms merge their operations

Which of the following is NOT a correct statement about diversification?

A. There is no limit to the amount of risk that can be eliminated through diversification

Kathryn is an individual investor. She sells shares at the _____ price and purchases shares at the _____ price

A. asked ; bid B. average ; asked C. *bid ; asked* D. bid ; average E. asked ; average

When stocks are held in an index in proportion to their company market value, the index is:

A. balanced B. front-weighted C. back-weighted D. price-weighted E. *value-weighted*

Matt currently owns 545,000 shares of LULU stock. He will sell those shares for $21.10 a share. He is also willing to purchase additional shares for $21.07 a share. Matt is a securities:

A. broker B. representative C. underwriter D. floor or ceiling broker E. *dealer*

Jamie agreed this morning to sell Steve 100 bushels of corn three months from now at a price of $5 a bushel. This is an example of a:

A. call option B. put option C. *futures contract* D. money market security E. fixed-income security

If you owe a security and make money if the price of the security increases you are said to have a _______ position

A. cash B. margin C. short D. *long* E. discretionary

Investors seeking to increase their wealth as quickly as possible would invest in:

A. corporate bonds and preferred stock B. large company stocks with high dividends C. *smaller companies pursuing rapid growth* D. government bonds and low-risk income stocks E. all of the above

By utilizing a margin account rather than a cash account you will potentially ______ your sizable positive return and ______ your sizable negative returns

A. decrease ; decrease B. decrease ; increase C. increase ; decrease D. *increase ; increase* E. increase ; not effect

Cindy recently inherited $284,000 which she wishes to invest in the stock and bond markets. However, Cindy has no investment experience and wants a knowledgable professional to make all her investment decisions for her. Cindy most likely needs the services offered by a(n):

A. deep-discount broker B. discount broker C. *full-service broker* D. on-line broker E. cyber broker

The value which is equal to the ending price of a security minus the beginning price is called the:

A. dividend yield B. *capital gain or loss* C. arithmetic dollar return D. geometric dollar return E. total dollar return

What is the market value of a share of stock divided by the net income per share called?

A. earnings per share B. *price-earnings ratio* C. value-earnings ratio D. earnings yield E. market multiple

The _____ tells us that the expected return on a risky asset depends only on that asset's non-diversifiable risk:

A. efficient markets hypothesis B. *systematic risk principle* C. open markets theorem D. law of one price E. principle of diversification

If a stock consistently goes up (down) by 1.5% when the market portfolio goes up (dow) by 1.2% then its beta equals:

A. equals 1.50 B. *equals 1.25* (1.5 / 1.2) C. equals 1.00 D. equals 0.80 E. Insufficient information to answer the question

An agreement which provides the owner the right to buy or sell a specific asset at a specific price during a specific time period is called a(n) _______ contract

A. futures B. obligatory C. quoted D. fixed E. *option*

Which of the following is a characteristic of blue chip stocks?

A. guaranteed minimum annual dividend yield of $2 per share B. annual dividends of more than $5 per share C. *long and stable dividend and earnings records* D. relatively high risk exposure

A lending institution would prefer that a firm have a _____ debt-equity ratio and a _______ times interest earned ratio.

A. higher ; higher B. higher ; lower C. *lower ; higher* D. lower ; lower

The total dollar return on an equity investment is defined as the:

A. increase in value of a share of stock over a period of time B. income received divided by the initial value of the security C. *capital gain or loss plus any dividend* D. realized capital gain or loss E. dividend income received

Diversification is investing in a variety of assets with which one of the following as the primary goal?

A. increasing returns B. minimizing taxes C. *reducing some risks* D. eliminating all risk E. increasing the variance

The absolute minimum initial margin requirement is set by the:

A. individual investor B. brokerage firm C. individual broker D. SEC E. *Federal Reserve*

Which stage of an industry's growth cycle offers the greatest opportunity for an investor who is seeking capital gains?

A. initial development B. mature growth C. stability or decline D. *rapid expansion*

The minimum equity that must be maintained at all times in a margin account is called the:

A. initial margin B. initial equity position C. *maintenance margin* D. margin call E. call requirement

Initial margin is the term used to define the amount of money which:

A. is being borrowed to purchase a security B. represents the maximum amount which your brokerage firm will lend to purchase a security C. represents the maximum amount which the Federal Reserve allows as a loan for a security purchase D. represents the minimum equity which must be maintained in a security at all times E. *must be paid in cash to purchase a security*

Which of the following is NOT true regarding beta coefficient?

A. it is a measure of systematic risk B. A beta less than one represents lower systematic risk than a beta greater than one C. generally speaking, the higher the beta the higher the expected returns D. * a beta of one indicates an asset is totally risk-free* E. The risk premium of an asset will increase if the beta of that asset increases

The portfolio risk that decreases as the number of securities in the portfolio increases is referred to as:

A. market risk B. *diversification* C. non diversification D. inefficient E. efficient

The balance sheet value of a firm's assets minus the balance sheet amount of liabilities is known as:

A. par value B. *book value* C. liquidation value D. market value

Which of the following returns is the average return you expect to earn in the future on a risky asset?

A. realized return B. *expected return* C. market return D. real return E. adjusted return

Which of the following businesses will be negatively impacted by a strong dollar?

A. retailing B. imports C. *exports* D. automotive

The rate of return earned on a U.S treasury bill is frequently used as a proxy for the:

A. risk premium B. deflated rate of return C. *risk-free rate* D. expected rate of return E. market rate of return

The excess return required from an investment in a risky asset over a risk-free investment is called:

A. risk-free rate of interest B. market rate of interest C. market risk premium D. real rate of interest E. *asset risk of premium*

Fundamental analysis involves the in-depth study of the:

A. role of non diversifiable risk in an investor's portfolio B. *financial condition and operating results of a given firm* C. pattern of security prices as revealed in chart formations D. role of diversifiable risk in an investor's portfolio

Correlation is the:

A. squared measure of a security's total risk B. *extent to which the returns on two assets move together* C. measurement of the systematic risk contained in an asset D. daily returns on an asset compared to its previous daily returns E. spreading of an investment across a number of assets

Top-down security analysis:

A. starts with the fundamental analysis of a firm B. *includes economic, industry, and fundamental analysis* C. concentrates on the competency of the senior management of a firm D. centers on the past performance of a firm

To reduce risk as much as possible, you should combine assets which have one of the following correlation relationships?

A. strong positive B. slightly positive C. slightly negative D. *strongly negative* E. zero

Which of the following will most directly influence a company's market value?

A. the state of the economy B. the book value of its asset C. the use of financial leverage D. *its future cash flows*

Which of the following is considered the best method of comparing the returns on various-sized investments?

A. total dollar return B. real dollar return C. absolute dollar return D. *percent return* E. variance return

Leo owns 500 shares of XYZ stock but his brokerage firm is listed as the registered owner of the securities. Under this arrangement, the securities are said to be held in:

A. transit B. record ownership status C. *street name* D. a wrap account E. a discretionary account

Which of the following terms is the measure of the tendency of two things to move or vary together?

A. variance B. squared deviation C. standard deviation D. alpha E. *covariance*

The security market line depicts the graphical relationship between which two of the following: 1. expected return 2. surprise return 3. systematic risk 4. unsystematic risk

A.* 1 / 3* (expected return / systematic risk) B. 1 / 4 C. 2 / 3 D. 2 / 4 E. none of these

A company's trailing P/E Ratio should always be less than its forward P/E Ratio

False

Changes in stock prices tend to lag changes in level of economic activity by several months

False

Earning a high rate of return with little or no risk is a realistic investment goal

False

For most stocks, the returns from dividend income far exceeds the return from capital gains:

False

High dividend yields are typical of rapidly growing companies.

False

The best time to buy stock is at the peak of an economic cycle

False

Home Interior's stock has an expected return of 12.89 percent and a beta of 1.28. The market return is 10.7 and the risk-free rate is 2.8 percent. This stock is "blank" because the CAPM return for the stock is "blank" percent.

Risk-free rate + (beta x (market return - risk-free rate)) 2.8 + (1.28 * (10.7 - 2.8)) = 12.91 (overvalued)

A PEG ratio less than one can be considered a good thing.

True

A stock's investment value can be much higher than its book value

True

Accounting has the opportunity to make a company look better through the use of credit sales.

True

Accounting has the opportunity to make a company look better through the use of depreciation

True

Although bear markets on average occurs every 3 to 4 years, the timing of bear markets is very hard to predict

True

Corporations often split their stocks when they believe that the prices make them less attractive to average investors

True

Economic analysis is concerned with how the general state of the economy will impact the performance of a particular company within a particular industry.

True

Stocks which perform well in a faltering economy are called defensive stocks.

True

To predict the demand for an industrial sector, it is essential to understand the economic forces that affect the industry

True

When investors expect higher inflation, they will generally require higher rate of returns:

True