Chapter 9 Conceptual Questions, Chapter 10 Conceptual Questions, Finance 3000 Exam 3

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

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

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

Consider an asset that provides the same return no matter what economic state occurs. What would be the 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

Investor enthusiasm causes an inflated bull market that drives 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

The efficient frontier portfolios are __________________________. A. portfolios that risk adverse investors will select B. portfolios where all the market risk is diversified away C. portfolios where the correlation among assets is 0.0 D. portfolios that dominate all others

D

The study of the cognitive processes and biases associated with making financial and economic decisions is known as _______________. A. Efficient Thinking Hypothesis B. Financial Cognition C. Financial Leverage D. Behavioral Finance

D

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

This is defined as the volatility of an investment, which includes firm specific risk as well as market risk. A. diversifiable risk B. market risk C. standard deviation D. total risk

D

This is the dollar return characterized as a percentage of money invested. A. average return B. dollar return C. market return D. percentage return

D

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

Which of the following are investor diversification problems? A. Many employees hold mostly their employer's stocks as investments. B. Many households hold relatively few individual stocks—the median is three. C. Investors seem to prefer local firms thereby limiting diversification opportunities. D. All of these are investor diversification problems.

D

Which of the following describes what will occur as you randomly add stocks to your portfolio? A. The nondiversifiable risk will decrease. B. Both the diversifiable and nondiversifiable risk will decrease. C. The portfolio return will increase. D. The diversifiable risk will decrease.

D

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

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

Which of the following makes this a true statement: The shape of the efficient frontier implies that A. diminishing returns apply to risk-taking in the investment world. B. increasing returns apply to risk-taking in the investment world. C. returns are not impacted by risk-taking in the investment world. D. None of these complete the sentence to make it true.

A

Which of the following statements is correct? A. A dominant portfolio has the best risk-return relationship as compared to other portfolios. B. It is not necessarily true that when an investment achieves a high return that it is risky. C. A low standard deviation means that the investment is less likely to achieve high returns; which means that is more risky. D. None of these statements are correct.

A

Which of the following statements is correct? A. A single stock has a lot of diversifiable risk. B. A single stock has more market risk than a diversified portfolio of stocks. C. Bonds and stocks have a high correlation because they are both financial assets. D. None of these statements are correct.

A

The optimal portfolio for you will be ______________________. A. the one that offers the lowest correlation B. the one that offers the highest returns C. the one that reflects the amount of risk that you are willing to take D. the one that offers the most diversification

C

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

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

This index tracks 500 companies which allows for a great deal of diversification. A. Nasdaq B. Fortune 500 C. S&P 500 D. Wall Street Journal

C

This is another term for market risk. A. firm specific risk B. modern portfolio risk C. nondiversifiable risk D. total risk

C

This is defined as a combination of investment assets held by an investor. A. bundle B. market basket C. portfolio D. All of these

C

This is the investor's combination of securities that achieves the highest expected return for a given risk level. A. efficient portfolio B. modern portfolio C. optimal portfolio D. total portfolio

C

This is the reward investors require for taking risk. A. required return B. risk-free rate C. risk premium D. market risk premium

C

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

Which of the following is correct regarding the coefficient of variation? A. It measures the amount of standard deviation for each one percent of covariance. B. It measures the amount of return achieved for each one percent of risk taken. C. It measures the amount of risk taken for each one percent of return achieved. D. None of these statements are correct.

C

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

Which of the following statements is correct regarding total risk? A. The coefficient of variation is a measure of the firm's total risk. B. All firms have the same amount of total risk because they are all exposed to the same market risk. C. Conglomerates will have less total risk than a firm that has one line of business. D. None of these statements are correct.

C

Ultra Petroleum (UPL) has earnings per share of $1.35 and a P/E ratio of 32.52. What's the stock price?

$43.90

A preferred stock from Duquesne Light Company (DQUPRA) pays $3.50 in annual dividends. If the required return on the preferred stock is 6.40 percent, what's the value of the stock?

$54.69

This is the portion of total risk that is attributable to overall economic factors. A. firm specific risk B. market risk C. modern portfolio risk D. total risk

B

Which of these is the portion of total risk that is attributable to overall economic factors?

Market Risk

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

A company has a beta of 0.57 If the market return is expected to be 12.7 percent and the risk-free rate is 5.35 percent, what is the company's required return?

9.54%

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

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

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

This is a measurement of the co-movement between two variables that ranges between -1 and +1. A. coefficient of variation B. correlation C. standard deviation D. total risk

B

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

This is the concept and procedure for combining securities into a portfolio to minimize risk. A. firm specific theory B. modern portfolio theory C. optimal portfolio theory D. total portfolio theory

B

Paychex Inc. (PAYX) recently paid a dividend of $0.96. The dividend is expected to grow at a 15 percent rate. The current stock price is $58.11. What is the return shareholders are expecting?

16.9%

The past five monthly returns for PG Company are 3.15 percent, -.35 percent, 4.55 percent, 6.69 percent, and 4.24 percent. What is the average monthly return?

3.656%

Jane Adams invests all her money in the stock of one firm. Which of the following must be true? A. Her return will have more volatility than the return in the overall stock market. B. Her return will have less volatility than the return in the overall stock market. C. Her return will have the same volatility as the return in the overall stock market. D. There is no relationship between her return and the return in the overall stock market.

A

Modern portfolio theory is ________________. A. a concept and procedure for combining securities into a portfolio to minimize risk B. a concept and procedure for combining securities into a portfolio to maximize return C. a concept and procedure for combining securities into a portfolio to maximize volatility D. a concept and procedure for combining securities into a portfolio to maximize dollar return

A

Special rights 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

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

This is a measure of risk to reward earned by an investment over a specific period of time. A. coefficient of variation B. market deviation C. standard deviation D. total variation

A

This is a measure summarizing the overall past performance of an investment. A. average return B. dollar return C. market return D. percentage return

A

This is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification. A. firm specific risk B. market risk C. modern portfolio risk D. total risk

A

This is the term for portfolios with the highest return possible for each risk level. A. efficient portfolios B. modern portfolios C. optimal portfolios D. total portfolios

A

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

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

We commonly measure the risk-return relationship using which of the following? A. coefficient of variation B. correlation coefficient C. standard deviation D. expected returns

A

Which of the following is correct regarding the total risk of a company? A. A company can change its risk level over time. B. Some firms are riskier because they offer many different products and/or services. C. Companies can change their risk by reducing the amount of money they have borrowed. D. None of these statements are correct.

A

Which of the following is incorrect? A. It is possible to combine assets that all move in the exact same fashion over time and gain the benefits of diversification. B. Adding long-term Treasury bonds to a stock portfolio will reduce the risk of the portfolio. C. The optimal portfolio is the one with the lowest amount of risk. D. All of these statements are correct.

A

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

Which of the following statements is correct? A. If the market is 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

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

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 states that security prices fully reflect all available information. C. The security market line shows the relationship between return and risk as measured by beta. D. None of these statements are correct.

A

A measure of the sensitivity of a stock or portfolio to market risk. A. behavioral finance B. beta C. efficient market D. hedge

B

From 1950 to 2007, the average return in the stock market, as measured by the S&P500, was 13.2% and a standard deviation of 17%. Given this information, which of the following statements is correct? A. With an average return this high, it is unlikely that an investor will lose money in the stock market in the next year or two. B. With a standard deviation this high, it is likely that an investor will lose money in some years over a 25-year investment period. C. This investment is not very good since the standard deviation is greater than the average return. D. All of these statements are correct.

B

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

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

In 2000, the S&P500 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

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

Interest rates, inflation and economic growth are economic factors that are examples of ______________________. A. Firm-specific risks that can be diversified away B. Market risk C. External factors that are neither firm specific risk nor market risk D. None of these statements are correct

B

Jenna receives an investment newsletter that recommends that she invest in a stock that has doubled the return of the S&P 500 in the last two months. It also claims that this stock is a "safe bet" for the future. Which of the following statements is correct regarding this information? A. This investment newsletter is most likely correct because they most likely have some special knowledge about the stock. B. The investment newsletter contains contrary information since the stock must be a high risk and therefore cannot also be a "safe bet." C. It is common for individual stocks to double the return of the S&P500 and still be a "safe bet." D. None of these statements are correct.

B

Sally wants to invest in only two stocks. Which pair of stocks should Sally select? A. Stocks A and B move downward at the same time. B. Stocks C and D move in opposite directions at the same time. C. Stocks E and F move upward at the same time. D. Stocks G and H move randomly at the same time.

B

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

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

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

The set of probabilities for all possible occurrences. A. probability B. probability distribution C. stock market bubble D. market probabilities

B

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

The total risk of the S&P500 Index is equal to ____________________. A. diversifiable risk B. nondiversifiable risk C. modern portfolio risk D. efficient frontier risk

B

The use of debt to increase an investment position. A. behavioral finance B. financial leverage C. probability D. stock market bubble

B

This includes any capital gain (or loss) that occurred as well as any income that you received from a specific investment. A. average return B. dollar return C. market return D. portfolio

B

To find the percentage return of an investment, A. multiply the dollar return by the investment's value at the beginning of the period. B. divide the dollar return by the investment's value at the beginning of the period. C. multiply the dollar return by the investment's value at the end of the period. D. divide the dollar return by the investment's value at the end of the period.

B

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

Which of the following is a true statement? A. The risk and return that a firm experienced in the past is also the risk level for its future. B. Firms can quite possibly change their stocks' risk level by substantially changing their business. C. If a firm takes on 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

Which of the following is the correct ranking from least risky to most risky? A. Long-term Treasury bonds, Stocks, Treasury Bills B. Treasury Bills, Long-term Treasury Bonds, Stocks C. Stocks, Long-term Treasury Bond, Treasury Bills D. Stocks, Treasury Bills, Long-term Treasury Bonds

B

Which of the following statements is correct? A. Uncorrelated assets have a correlation of -1.0. B. Most common stocks are positively correlated with each other because they are impacted by the economic factors. C. We can typically add many stocks together to fully eliminate the market risk in a portfolio. D. None of these statements are correct.

B

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

Which statement is true? A. The larger the standard deviation, the lower the total risk. B. The larger the standard deviation, the higher the total risk. C. The larger the standard deviation, the more portfolio risk. D. The standard deviation is not an indication of total risk.

B

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&P500 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

What is a measurement of the co-movement between two variables that ranges between -1 and +1?

Correlation

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

Which of the following is correct? A. Investors can reduce the risk in their portfolio by investing in international stocks since they tend to have low correlation with our own stock market. B. Combining both stocks and bonds will likely reduce risk in a portfolio because the two assets have low correlation. C. Your optimal portfolio is an efficient portfolio with your desired risk level. D. All of these statements are correct.

D

Which of the following is correct? A. Over a long time frame, stocks have performed better than Long-term Treasury Bonds. B. Average stock returns are not an indication of what an investor may earn in any ONE year. C. In some years, Long-term Treasury Bonds performed better than stocks. D. All of these statements are correct.

D

Which of the following is correct? A. Total risk is measured by the standard deviation. B. There is a positive relationship between risk and return. C. If you observe a high variability in a stock's returns you can infer that the stock is very risky. D. All of these statements are correct.

D

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

Which of the following statements is correct regarding total risk? A. A conglomerate will have more total risk than a firm that has one line of business. B. All firms have about the same total risk because they are all exposed to the same market risk. C. Total risk can be quantified by measuring the covariance between the firm and the overall market. D. None of these statements are correct.

D

Which of the following statements is correct with regards to diversification? A. Diversifying reduces the return of the portfolio. B. Diversifying reduces the market risk of the portfolio. C. Diversifying reduces the dollar return of the portfolio. D. None of these statements are correct.

D

Which of the following statements is correct? A. For a few firms in completely different industries, it is possible to have a correlation that approaches -2.0. B. A correlation of -1.0 means that the two firms are uncorrelated or that they have no relationship. C. Most common stocks have low correlation with each other since they operate in different industries. D. None of these statements are correct.

D

Which of the following statements is correct? A. Stocks and long-term Treasury bonds are highly positively correlated. B. Stocks and Treasury bills are highly positively correlated. C. Stocks, long-term Treasury bonds and Treasury bills are all highly correlated. D. None of these statements is correct.

D

Which of the following statements is correct? A. The dollar return is a more useful measure to compare performance because it more accurately reflects the change in wealth of the investor. B. A dominant portfolio is one that has the highest risk and highest return within a set of portfolios. C. By adding stocks to your portfolio, it is possible to effectively eliminate nearly all of the market risk. D. None of these statements are correct.

D

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

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

Which of these statements is true? A. When people purchase a stock, they know exactly what their dollar and percent return are going to be. B. Many people purchase stocks as they find comfort in the certainty for this safe form of investing. C. When people purchase a stock, they know the short-term return, but not the long term return. D. When people purchase a stock, they do not know what their return is going to be - either short term or in the long run.

D