172 Concept Quiz Week 2

If the covariance between a stock and the market is 2 and the variance of the market is 3, what is the stock's beta? -0.33 -0.2 -1.5 -0.66

0.66

Which of the following is generally considered to be a risk-free security? -Corporate bond -3-month treasury bill -Common stock -Municipal bond

3-month treasury bill

If a firm has a target debt-equity ratio of 0.5, what is the firm's target capital structure weight for common stock? -50% -33.33% -66.66% -40%

66.66%

If the risk-free rate is 3 percent, the market risk premium is 7 percent, the industry beta is 1, and the firm beta is 2, the cost of equity will be ____ percent less if the industry beta is used instead of the firm beta. -8 -10 -4 -7

7

If a firm has multiple projects, each project should be discounted using ___. -the firm's total cost of capital -the marginal cost of capital for the most recent project -a discount rate appropriate for the project's risk -the average cost of capital

a discount rate appropriate for the project's risk

If you can beat the market by ___ then you are violating weak form efficiency. -analyzing balance sheets -using your intuition -analyzing historical price patterns -utilizing insider information

analyzing historical price patterns

For a diversified investor, what is the best way to measure the systematic risk of an individual security? -standard deviation -covariance -variance -beta

beta

Which of the following are ways to create valuable financing opportunities? Select all correct answers. -sell more preferred stock -create a new type of security -reduce costs or increase subsidies -rely more on debt than equity

create a new type of security, reduce costs or increase subsidies

___ studies examine whether or not the release of information on one day influences stock returns on other days. -event -abnormal -release -serial

event

Which of the following have been identified by behavioral finance researchers as examples of irrationality? -buying both stocks and bonds -gambling -not diversifying enough -not minimizing taxes

gambling, not diversifying enough, not minimizing taxes

To apply the dividend discount model to a stock, you need to estimate the ___. Select all correct answers. -stock's beta -risk-free rate -growth rate -dividend yield

growth rate dividend yield

If investors have homogeneous expectations, they will ___. -assume the same level of risk aversion -disagree about the estimates of risk and return for individual securities -hold the same combination of risky and riskless assets -have similar estimates about the risk and return attributes of individual securities

have similar estimates about the risk and return attributes of individual securities

What happens to unsystematic risk in a large portfolio? -it is reduced to zero or close to zero -it is reduced to the risk-free rate -it equals the systematic risk -it increases in proportion to the beta of the portfolio

is reduced to zero or close to zero

If you were to consider the CAPM as a one-factor model, then the factor would be the: -market risk premium -GNP -rate of inflation -individual beta of each security or portfolio -risk-free rate

market risk premium

The general purpose of identifying multiple factors in the APT model is to: -reduce the slope of the security market line, thereby reducing portfolio risk. -identify the quantity of each factor that is needed to reduce a portfolio's risk, as measured by beta, to a level equal to that of the overall market. -identify and eliminate all systematic risks from a portfolio. -reduce the unsystematic risk to a level where the unsystematic risk of one security is unrelated to the unsystematic risk of any other security. -identify the top three factors that have the largest impact on the market rate of return.

reduce the unsystematic risk to a level where the unsystematic risk of one security is unrelated to the unsystematic risk of any other security.

Investors who jump into a hot market believing that the high returns will continue for an even longer period are said to exhibit ___. -conservatism -representativeness -foresight -wisdom

representativeness

Which of the following types of efficiency have empirical support? Select all correct answers. -semi-strong -semi-weak -weak -strong

semi-strong, weak

If you beat the market with inside information, you have violated the concept of ___ form efficiency. -strong -semi-weak -semi-strong -weak

strong

According to CAPM, what is the expected return on a security with beta of 1? -the risk-free rate -the expected return on the market -1% -0%

the expected return on the market

Standard deviation measures ___ risk while beta measures ___ risk. -total; systematic -systematic; unsystematic -systematic; total -unsystematic; systematic

total; systematic