Chapter 12 and 13 FM

beta

The security market line is a positively sloped straight line that displays the relationship between expected return and ____________. Multiple Choice WACC Risk Portfolio Market Risk Premium Beta

semi strong

You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor often comments on the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best _____ form efficient. Multiple Choice weak semiweak semistrong strong perfect

weighted

Portfolio Beta is the ______________ average of the Betas of the investments included in the portfolio. multiple choice Weighted Arithmetic Geometric Riskless Expected

true

Risk-free assets have a beta of 0 and the market portfolio has a beta of 1. true or false

volatilly

Standard deviation is a measure of which one of the following? Multiple Choice Average rate of return Volatility Probability Risk premium Real returns

risky

Expected return is the return on a _______ asset expected in the future. Multiple Choice average risky no-risk risk-free portfolio

strong

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. Multiple Choice weak semiweak semistrong strong perfect

return on a risky security minus the risk-free rate.

The excess return is computed as the: Multiple Choice return on a security minus the inflation rate. return on a risky security minus the risk-free rate. risk premium on a risky security minus the risk-free rate. risk-free rate plus the inflation rate. risk-free rate minus the inflation rate.

increase the risk premium

To convince investors to accept greater volatility, you must: Multiple Choice decrease the risk premium. increase the risk premium. decrease the real return. decrease the risk-free rate. increase the risk-free rate.

standard deviation;beta

________ measures total risk, and ________ measures systematic risk. Multiple Choice Beta; alpha Beta; standard deviation Alpha; beta Standard deviation; beta Standard deviation; variance

The return on a risk-less asset

The Capital Asset Pricing Model (CAPM) shows that the expected return for a particular asset depends on all of the following, except: The return on a risk-less asset The pure time value of money The reward for bearing systematic risk The amount of systematic risk

11.14

Connor Corp. has large amount of data that they are trying to analyze from the last 15 years. They have an arithmetic sales growth average of 12% and a geometric average growth of 9%. Using Blume's formula, what would the forecast sales growth be for the next five years? Multiple Choice 8.44% 9.05% 10.54% 10.95% 11.14%

The capital gains yield is positive.

Vanessa purchased a stock one year ago and sold it today for $3.15 per share more than her purchase price. She received a total of $2.60 per share in dividends. Which one of the following statements is correct in relation to this investment? Multiple Choice -The dividend yield is expressed as a percentage of the par value. -The capital gain would have been less had Vanessa not received the dividends. -The total dollar return per share is $.55. -The capital gains yield is positive. -The dividend yield is greater than the capital gains yield.

A national decrease in consumer spending on entertainment

Of the options listed below, which is the best example of unsystematic risk? Multiple Choice An across-the-board increase in income taxes An adoption of a national sales tax A decrease in the national level of inflation An increased feeling of global prosperity A national decrease in consumer spending on entertainment

Treasury Bills

The rate of return on which type of security is normally used as the risk-free rate of return? Multiple Choice Long-term Treasury bonds Long-term corporate bonds Treasury bills Intermediate-term Treasury bonds Intermediate-term corporate bonds

Spreading an investment across many diverse assets will eliminate some of the total risk.

Which of the following statements best describes the principle of diversification? Multiple Choice Concentrating an investment in two or three stocks will eliminate all of the unsystematic risk. Concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. Spreading an investment across multiple diverse companies will not lower the total risk. Spreading an investment across many diverse assets will eliminate all of the systematic risk. Spreading an investment across many diverse assets will eliminate some of the total risk.

It can be effectively eliminated by portfolio diversification.

Which of the following statements regarding unsystematic risk is accurate? Multiple Choice It can be effectively eliminated by portfolio diversification. It is compensated for by the risk premium. It is measured by beta. It is measured by standard deviation. It is related to the overall economy.

Capital gains yield and total return

Which of the following yields on a stock can be negative? Multiple Choice Dividend yield Capital gains yield Capital gains yield and total return Dividend yield, capital gains yield, and total return Dividend yield and total return

The information was expected.

Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semistrong form efficient. Multiple Choice Company insiders were aware of the information prior to the announcement. Investors do not pay attention to daily news. Investors tend to overreact. The news was positive. The information was expected.

A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio.

Which one of the following statements is accurate? Multiple Choice Portfolio betas range between −1.0 and +1.0. A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio. A portfolio beta cannot be computed from the betas of the individual securities comprising the portfolio because some risk is eliminated via diversification. A portfolio of U.S. Treasury bills will have a beta of +1.0. The beta of a market portfolio is equal to zero.

False

true or false: The arithmetic average tells you what you actually earned per year on average, whereas the geometric average tells you what you earned in a typical year.

the markets are continually reacting to new information.

Efficient financial markets fluctuate continuously because: Multiple Choice the markets are continually reacting to old information as that information is absorbed. the markets are continually reacting to new information. arbitrage trading is limited. current trading systems require human intervention. investments produce varying levels of net present values.

Geometric averages

When attempting to forecast for extremely long intervals, such as 50 years, it is best to use: Multiple Choice Geometric Averages Arithmetic Averages Expected Return Averages Forecasting Averages Long Range Modeling Averages

expected return

While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2 percent figure is called the: Multiple Choice arithmetic return. historical return. expected return. geometric return. required return.

unsystematic risk

An investor who owns a well-diversified portfolio would consider ________ to be irrelevant. Multiple Choice systematic risk unsystematic risk market risk nondiversifiable risk the systematic portion of a surprise

unsystematic

An unexpected post on social media caused the prices of 22 different companies' stocks to immediately increase by 10 to 15 percent. This occurrence is best described as an example of ________ risk. Multiple Choice portfolio nondiversifiable market unsystematic expected

Efficient capital market

Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions? Multiple Choice Riskless market Evenly distributed market Zero volatility market Blume's market Efficient capital market

risk premium

Assume that last year T-bills returned 2.2 percent while your investment in large-company stocks earned an average of 8.1 percent. Which one of the following terms refers to the difference between these two rates of return? Multiple Choice Risk premium Geometric average return Arithmetic average return Standard deviation Variance

underpriced

Assume the market rate of return is 10.1 percent and the risk-free rate of return is 3.2 percent. Lexant stock has 2 percent less systematic risk than the market and has an actual return of 10.2 percent. This stock: Multiple Choice is underpriced. is correctly priced. will plot below the security market line. will plot on the security market line. will plot to the right of the overall market on a security market line graph.

8%

If risk-free investments are currently 6% and our expected return from Stock V was 14%. What is the risk premium on this investment? Multiple Choice 2% 4% 6% 8% 10%

reward-to-risk ratio

If the market is efficient and securities are priced fairly, all securities will have the same: Multiple Choice variance. standard deviation. reward-to-risk ratio. beta value. market risk premium.

Investors panic causing security prices around the globe to fall precipitously.

Of the options listed below, which is the best example of systematic risk? Multiple Choice Investors panic causing security prices around the globe to fall precipitously. A flood washes away a firm's warehouse. A city imposes an additional one percent sales tax on all products. A toymaker has to recall its top-selling toy. Corn prices increase due to increased demand for alternative fuels.

18%

The economy has been very volatile lately. There is a 40% chance of recession and a 60% chance of a boom. Stock A would have a return of −15% if there was a recession but, a 40% return in a boom economy. What is the expected return for Stock A? Multiple Choice −18% −15% 18% 15% 40%